UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2016.
or
[ ]
Transition Report Pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________________ to ______________________.
Commission file number 000-55363
VAPOR HUB INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
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Nevada | 27-3191889 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
1871 Tapo Street
Simi Valley, CA 93063
(Address of principal executive offices) (zip code)
(805) 309-0530
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller” reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] | Accelerated filer [ ] |
Non-accelerated filer [ ] (Do not check if smaller reporting company) | Smaller reporting company [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 14, 2016, the issuer had 90,292,443 shares of common stock issued and outstanding.
1
VAPOR HUB INTERNATIONAL INC
Part I. Financial Information
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| September 30, |
| June 30, |
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| 2016 |
| 2016 |
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| (unaudited) |
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Assets | ||||||
Current assets |
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| Cash |
| $ 85,942 |
| $ 607,960 | |
| Accounts receivable | 4,505 |
| 880 | ||
| Inventory | 790,399 |
| 585,489 | ||
| Prepaid expenses and other current assets | 229,204 |
| 38,254 | ||
| Other current assets | 10,556 |
| 10,556 | ||
Total current assets | 1,120,606 |
| 1,243,139 | |||
Fixed assets, net | 126,320 |
| 134,223 | |||
Long term assets | 14,427 |
| 14,341 | |||
| Total assets | $ 1,261,353 |
| $ 1,391,703 | ||
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Liabilities and Stockholders' Deficit | ||||||
Current liabilities |
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| Accounts payable and accrued expenses | $ 614,216 |
| $ 828,146 | ||
| Deferred income | 155,276 |
| 94,754 | ||
| Equipment leases payable | 851 |
| 1,247 | ||
| Convertible notes payable, net of unamortized debt discount | 91,197 |
| 315,373 | ||
| Notes payable, net of unamortized debt discount | 135,096 |
| 7,211 | ||
| Loans from related parties | 146,277 |
| 103,409 | ||
| Derivative liabilities | 503,887 |
| 827,883 | ||
| Total current liabilities | 1,646,800 |
| 2,178,023 | ||
Long term liabilities |
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| Notes payable- long term | 21,587 |
| 23,137 | ||
| Long term liabilities | 21,587 |
| 23,137 | ||
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| Total liabilities | 1,668,387 |
| 2,201,160 | |
Stockholders' deficit |
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| Preferred stock, $0.001 par value, 10,000,000 authorized, 0 issued and outstanding as of September 30, 2016 and June 30, 2016, respectively | - |
| - | ||
| Common stock, $0.001 par value, 1,010,000,000 shares authorized; 90,292,443 and 86,860,375 issued outstanding as of September 30, 2016 and June 30, 2016, respectively | 90,292 |
| 86,860 | ||
| Additional paid-in-capital | 808,595 |
| 775,929 | ||
| Accumulated deficit | (1,305,921) |
| (1,672,246) | ||
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| Total stockholders' deficit | (407,034) |
| (809,457) | |
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| Total liabilities and stockholders' deficit | $ 1,261,353 |
| $ 1,391,703 | |
The accompanying notes are integral part of these condensed financial statements
3
VAPOR HUB INTERNATIONAL INC.
Unaudited Condensed Statements of Operations
| Three Months Ended |
| Three Months Ended |
| September 30, 2016 |
| September 30, 2015 |
Merchandise Sales, net | $ 2,425,222 |
| $ 1,962,345 |
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Royalties | 70,000 |
| - |
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Total net revenues | 2,495,222 |
| 1,962,345 |
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Cost of revenue | 1,559,097 |
| 1,203,842 |
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Gross profit | 936,125 |
| 758,503 |
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General and administrative expenses | 665,656 |
| 701,741 |
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Net income from operations | 270,469 |
| 56,762 |
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Other income (expense) |
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Interest expense | (33,273) |
| (32,686) |
Amortization of finance fees | (35,364) |
| (9,765) |
Interest expense - amortization of debt discount | (126,031) |
| (42,181) |
Loss on extinguishment of debt | (74,870) |
| - |
Change in fair value of derivative liabilities | 366,194 |
| (45,483) |
Other income (expense) | 96,656 |
| (130,115) |
Net income (loss) before taxes | 367,125 |
| (73,353) |
Income tax provision | 800 |
| 800 |
Net income (loss) | $ 366,325 |
| $ (74,153) |
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Net loss per share: |
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Basic | $ 0.00 |
| $ (0.00) |
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Diluted | $ 0.00 |
| $ (0.00) |
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Weighted average shares outstanding: |
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Basic | 88,986,765 |
| 72,455,606 |
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Diluted | 158,843,321 |
| 72,455,606 |
The accompanying notes are integral part of these condensed financial statements
4
VAPOR HUB INTERNATIONAL INC.
Unaudited Condensed Statements of Cash Flows
| Three Months Ended |
| Three Months Ended |
| September 30, 2016 |
| September 30, 2015 |
Operating Activities |
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Net income (loss) | $ 366,325 |
| (74,153) |
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
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Depreciation | 7,903 |
| 7,764 |
Amortization of debt discount on convertible notes | 126,031 |
| 1,165 |
Amortization of debt discount on short term note | - |
| 38,179 |
Amortization of deferred finance costs | 35,364 |
| 14,765 |
Amortization of derivative debt discount | - |
| 2,837 |
Loss on extinguishment of debt | 42,198 |
| - |
Change in derivative liabilities | (366,194) |
| 45,483 |
Non cash interest for conversion of notes payable | 8,406 |
| - |
Changes in operating assets and liabilities: |
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Accounts receivable | (3,625) |
| 181 |
Inventory | (204,910) |
| (176,224) |
Prepaid expenses and other current and long term assets | (41,778) |
| 6,582 |
Security deposit | (86) |
| (7,446) |
Deferred income | 60,522 |
| (29,669) |
Accounts payable and accrued expenses | (177,831) |
| 64,529 |
Net cash used in operating activities | (147,675) |
| (106,007) |
Investing Activities |
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Purchase of property and equipment | - |
| (5,734) |
Net cash used in investing activities | - |
| (5,734) |
Financing Activities |
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Payments on leased property loans | (396) |
| (1,071) |
Payments on financed insurance premiums | (21,287) |
| (32,507) |
Proceeds from related party loans | 47,718 |
| (36,188) |
Payments on related party loans | (4,850) |
| - |
Proceeds from convertible notes payable | - |
| - |
Payments on convertible notes payable | (393,977) |
| (105,469) |
Proceeds from short term notes payable | - |
| 200,000 |
Payments on short term notes payable | - |
| 86,003 |
Payments for deferred finance costs | - |
| (17,500) |
Payments on auto loan payables | (1,551) |
| (1,491) |
Net cash used in financing activities | (374,343) |
| (80,229) |
Net change in cash | (522,018) |
| (191,970) |
Cash at beginning of period | 607,960 |
| 351,081 |
Cash at end of period | $ 85,942 |
| $ 159,111 |
Supplemental disclosure of cash flow information: |
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Cash paid for: |
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Interest | $ 32,713 |
| $ 33,886 |
Income taxes | $ 800 |
| $ 800 |
Non-cash transactions: |
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Non cash repayment and borrowings of short term note payable | $ 2,500 |
| $ - |
Insurance premium financing | $ 149,173 |
| $ 146,908 |
Derivative liability | $ 74,112 |
| $ 114,067 |
Shares issued for extinguishment of debt | $ 36,098 |
| $ - |
The accompanying notes are integral part of these condensed financial statements
5
VAPOR HUB INTERNATIONAL INC.
Notes to Unaudited Condensed Financial Statements
NOTE 1- INCORPORATION, NATURE OF OPERATIONS AND ACQUISITION
Vapor Hub International Inc. (formerly DogInn, Inc.) (hereinafter known as “the Company”) was incorporated in the State of Nevada on July 15, 2010. On February 14, 2014, the Company entered into a Share Exchange Agreement with Vapor Hub Inc., a California corporation (“Vapor”), Delite Products, Inc., a California corporation (“Delite”) and the shareholders of both companies (the “Exchange Agreement”). As a result of the closing of the transactions contemplated by the Exchange Agreement, Vapor and Delite became the Company’s wholly owned subsidiaries (which subsidiaries were subsequently merged into the Company on May 18, 2015, ending the separate existences of Vapor and Delite) and the Company now carries on the business of developing, producing, marketing and selling the next generation of electronic cigarettes, known as vaping devices, and related accessories, including e-liquids and atomizers.
NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying (a) condensed balance sheet at June 30, 2016 has been derived from audited statements and (b) the condensed unaudited financial statements as of and for the periods ended September 30, 2016 and 2015, have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (“US GAAP”) for complete financial statements, and should be read in conjunction with the audited financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2016 (the “2016 Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) on October 13, 2016. It is management’s opinion, however, that all material adjustments (consisting of normal recurring adjustments), have been made which are necessary for a fair financial statements presentation. The financial statements include all material adjustments (consisting of normal recurring accruals) necessary to make the financial statements not misleading as required by Regulation S-X, Rule 10-01. Operating results for the three months ended September 30, 2016 are not necessarily indicative of the results of operations expected for the year ending June 30, 2017.
This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s unaudited condensed financial statements. The unaudited condensed financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to US GAAP and have been consistently applied in the preparation of the unaudited condensed financial statements.
The Company operates in one segment in accordance with accounting guidance Financial Accounting Standards Board (“FASB”) ASC Topic 280, Segment Reporting. The Company’s Chief Executive Officer has been identified as the chief operating decision maker as defined by FASB ASC Topic 280.
Going Concern
The Company’s unaudited condensed financial statements have been presented on the basis that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company’s cash balance as of September 30, 2016, its working capital deficit along with other factors raise substantial doubt about its ability to continue as a going concern. The accompanying unaudited condensed financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
6
The Company continues to face liquidity and capital resources constraints using $147,675 in cash from operations in the three months ended September 30, 2016 and using $374,343 in financing activities during the same period. The Company does not believe that its operating cash flows will be sufficient to meet its financing needs for the next twelve months. The extent of the Company’s future capital requirements will depend on many factors, including the Company’s results from operations and the growth rate of the Company’s business. The Company’s near term objective is to raise debt or equity capital to fund its immediate cash needs and to finance its longer term growth.
The Company is also pursuing various means to increase revenues, reduce operating costs and to improve overall cash flow.
The Company presently does not have any arrangements for additional financing. However, the Company continues to evaluate various financing strategies to support its current operations and fund its future growth.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates significant estimates and assumptions related to its accounts receivable allowance, accounts payable, deferred income tax asset valuation allowances, fair value of derivative liability, fair value of stock and stock options, useful life of fixed assets, recoverability of long lived assets, inventory reserves, estimates of sales return and accrual for potential liabilities. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Concentration of Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash. The Company places its cash with high quality banking institutions. The Company did not have any cash accounts in excess of FDIC insured limits as of September 30, 2016.
The Company relied on three manufacturers to make all of the Company’s Mods during the three months ended September 30, 2016 and one manufacturer to make all of the Company’s Mods during the three months ended September 30, 2015.
The Company had a concentration in accounts payable of 45% and 49% to two manufacturers as of September 30, 2016.
Financial Instruments and Fair Value Measurement
Pursuant to ASC 820, Fair Value Measurements and Disclosures, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:
Level 1 - applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 - applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
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Level 3 - applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The Company’s financial instruments consist principally of cash, accounts payable, accrued liabilities, amounts due to related parties, derivative liabilities and convertible notes payable. Pursuant to ASC 820, the fair value of the Company’s cash is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. Pursuant to ASC 820, the fair value of the Company’s derivative liability is determined based on “Level 3” inputs, which consist of unobservable inputs. The Company believes that the recorded values of all of its other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.
Revenue Recognition
The Company recognizes merchandise revenues when delivery of goods or completion of services has occurred provided there is persuasive evidence of an agreement, acceptance has been approved by its customers, the fee is fixed or determinable based on the completion of stated terms and conditions, and collection of any related receivable is probable. The Company recognizes royalty revenues when products are sold by third parties and collection of any related receivable is probable.
For retail transactions, revenue is recognized at the point of sale. For wholesale and online transactions, revenue is recognized at the time goods are shipped.
Deferred Revenue
The Company accrues deferred revenue when customer payments are received, but product has not yet shipped. As of September 30, 2016 and June 30, 2016, the Company had recorded $155,276 and $94,754, respectively for deferred revenue as a result of prepayments for product made by customers. Those prepayments are recognized into revenue at the point those prepaid products have subsequently shipped. The Company expects to recognize the $155,276 into revenue during the current fiscal year.
Advertising Expense
Advertising costs are expensed as incurred. Advertising expense for the three months ended September 30, 2016 and 2015 were $13,015 and $38,657, respectively and are included in general and administrative expenses.
Deferred Finance Costs, Net
Costs with respect to the issuance of common stock, warrants, stock options or debt instruments by the Company are initially deferred and ultimately offset against the proceeds from such equity transactions or amortized to interest expense over the term of any debt funding, if successful, or expensed if the proposed equity or debt transaction is unsuccessful.
Unamortized finance costs for the three months ended September 30, 2016 and as of June 30, 2016 were $100,302 and $133,166 respectively.
The Company adopted ASU 2015-03 during the quarter ended September 30, 2016, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The Company’s adoption of this ASU did not have a significant impact on the Company’s financial position, results of operations or cash flows. The adoption resulted in a reclassification of deferred finance costs of $100,302 and $133,166 from current assets to offset against convertible notes payable in current liabilities as of September 30, 2016 and June 30, 2016, respectively.
Modification of Debt Instruments
The Company evaluated modifications of debt instruments under ASC 470-50-40 “Extinguishments of Debt” (“ASC 470”). ASC 470 requires modifications to debt instruments to be evaluated to assess whether the modifications are considered “substantial modifications”. A substantial modification of terms shall be accounted for like an extinguishment. For extinguished debt, a difference between the re-acquisition price and the net carrying amount of the extinguished debt shall be recognized currently in income of the period of extinguishment as losses or gains.
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Basic and Diluted Net Loss per Share
The Company computes net income per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options, warrants or debentures. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. As of September 30, 2016, there were 69,856,556 dilutive securities related to the convertible notes payable as the Company had net income and as of September 30, 2015, there were no dilutive securities as the Company had incurred a net loss. See Note 9 for further discussion.
Recent Accounting Pronouncements
In August 2016 the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently in the process of evaluating the impact of adoption on its financial statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The Company is currently in the process of evaluating the impact of the adoption on its financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. The ASU will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of adopting this guidance.
In November 2015, the FASB issued ASU 2015-17, which simplifies the presentation of deferred tax assets and liabilities on the balance sheet. Previous GAAP required an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts on the balance sheet. The amendment requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The Company is currently evaluating the potential impact this standard will have on its financial statements and related disclosures.
In September 2015, the FASB issued ASU 2015-16, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This ASU is effective for interim and annual reporting period beginning after December 15, 2016, including interim periods within those fiscal years, with the option to early adopt for financial statements that have not been issued. The Company is currently evaluating the potential impact this standard will have on its financial statements and related disclosures.
In July 2015, the FASB issued ASU 2015-11, which requires an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments apply to inventory that is measured using first-in, first-out (FIFO) or average cost. This ASU is effective for interim and annual reporting periods beginning after December 15, 2016, with the option to early adopt as of the beginning of an annual or interim period. The Company does not expect the adoption of this ASU to have a significant impact on its financial position, results of operations and cash flows.
9
The Company has reviewed other recent accounting pronouncements issued prior to the date of issuance of its financial statements included in this report, and does not believe any of these pronouncements will have a material impact on its financial statements.
NOTE 3 – OFFICERS’ LOANS PAYABLE
As of September 30, 2016 and June 30, 2016, the Company had a balance of $146,277 and $103,409 respectively, outstanding as related party loans from Kyle Winther, the Company’s CEO, Lori Winther, the Company’s CFO and Winther & Company, CPAs (an entity owned by Lori Winther, and her husband, Niels Winther, CPA, who is a director of the Company), as well as a Chase Bank Line of Credit (which was extended to the Company, though owed personally by Niels and Lori Winther). The outstanding balances are unsecured, non-interest bearing and repayable upon demand.
NOTE 4 – INVENTORIES
As of September 30, 2016 and June 30, 2016, the Company had a balance of $790,399 and $585,489, respectively, as inventories which consist of vaping devices, electronic cigarettes, e-liquid, related supplies, and accessories. There was no reserve for inventory obsolescence as of September 30, 2016 and June 30, 2016.
NOTE 5 – LEASE COMMITMENTS
On February 28, 2015, the Company entered into a lease agreement with landlord Samantha Carrington to provide retail space for its Simi Valley retail location and on April 1, 2015, the Simi Valley retail location opened at the new premises. The lease term extends through March 31, 2017 with a monthly lease payment of $3,190. The Company has a remaining commitment under this lease as of September 30, 2016 of $19,140 and a security deposit of $6,380 was paid to the landlord in relation to this lease.
On September 1, 2015, the Company entered into a Commercial Lease Agreement with the Winther Family Trust, pursuant to which the Company leases property located at 1871 Tapo Street, Simi Valley, CA 93065 (the “Premises”), for a term of 60 months commencing on September 1, 2015. The Company will pay a base rent of $5,650 per month for the duration of the term and also made a security deposit in the same amount. The Company has a remaining commitment under this lease as of September 30, 2016 of $265,550. The Premises replaced the Company’s prior facility located at 67 W. Easy St., Unit 115, Simi Valley, CA 93065 and serves as the Company’s primary office location. In addition to providing office space, the approximately 5,000 square foot facility is also used for warehousing and shipping. The lessor of the Premises, the Winther Family Trust, is controlled by Niels Winther and Lori Winther. Both Niels Winther and Lori Winther are Directors of the Company, and Lori Winther also serves as the Company’s Chief Financial Officer and Secretary.
On September 15, 2015, the Company entered into a lease agreement with Santa Susana Business Center, LLC to lease warehouse and office space at 4685 Runway Street, Unit D, Simi Valley, CA 93063. The lease term extends through September 30, 2017 with a monthly lease payment of $1,716 and increasing to $1,802 on October 1, 2016. The Company has a remaining commitment under this lease of $21,624 as of September 30, 2016 and a security deposit of $1,802 was paid to the landlord in relation to this lease.
Rent expense for the three months ended September 30, 2016 and 2015 was $31,668 and $32,952, respectively.
NOTE 6 – RELATED PARTIES
From time to time the Company will engage the services of Winther & Co. an accounting firm owned by the husband of the Company’s CFO. Winther & Co. provides bookkeeping, accounting and tax services to the Company. For the three months ended September 30, 2016 and 2015, the Company incurred approximately $10,156 and $18,262, respectively, in fees with Winther & Co. As of September 30, 2016 and June 30, 2016 the Company had Accounts Payable outstanding to related parties for accounting fees of $0 and $0, respectively.
Reference is also made to the Officer’s Loans Payable described in Note 3 and the Commercial Lease Agreement with the Winther Family Trust described in Note 5.
10
NOTE 7 – CONVERTIBLE NOTES PAYABLE
Note Holder | Balance |
| Unamortized Original |
| Unamortized Deferred |
| Balance of |
| Convertible Notes, Net of |
September 30, 2016 | Derivative Discount |
| Finance Cost Discount |
| Debt Discount | Discount and Deferred Cost | |||
Iliad Co Loan Payable | 43,156 |
| - |
| (1,875) |
| (1,875) |
| 41,281 |
TCA Global Loan Payable | 505,432 |
| (357,089) |
| (98,427) |
| (455,516) |
| 49,916 |
Total Convertible Notes Payable | 548,588 |
| (357,089) |
| (100,302) |
| (457,391) |
| 91,197 |
Description of Outstanding Convertible Note Obligations Outstanding as of September 30, 2016
Iliad Co-Investment Note
On August 12, 2015, the Company entered into a Note Purchase Agreement (the “Purchase Agreement”) with Iliad Research & Trading, L.P, a Utah limited liability partnership (“Iliad”), pursuant to which the Company concurrently issued to the investor an unsecured non-convertible Promissory Note in a principal amount of $245,000 (the “Original August Note”). The principal amount includes an original issue discount of $40,000 plus an additional $5,000 to cover the investor’s legal fees, accounting costs, due diligence, monitoring and other transaction costs incurred in connection with the transaction. In consideration for the Original August Note, the investor paid an aggregate cash purchase price of $200,000, computed as follows: $245,000 original principal balance, less the original issue discount of $40,000, and less the transaction costs. The Original August Note was originally scheduled to mature on February 12, 2016 and the Company could prepay all or a portion of the amount owed earlier than it is due without penalty. The original issue discount of $40,000 was recorded as debt discount and fully amortized to interest expense during the fiscal year ended June 30, 2016.
On February 19, 2016, the Company entered into an Amendment to Promissory Note with Iliad which extended the maturity date of the Original August Note to April 12, 2016 and increased the principal amount of the note by $2,500 as consideration for the extension. The Company evaluated the Amendment to Promissory Note under ASC 470-50-40 “Extinguishments of Debt” (“ASC 470”), noting it did not meet the criteria for substantial modification under ASC 470, and accordingly treated the amendment as a modification to the Original August Note, adding $2,500 to the balance and extending the due date under the modified terms.
On May 12, 2016 but effective as of April 15, 2016, the Company entered into an Exchange Agreement with Iliad (the “Exchange Agreement”). Pursuant to the Exchange Agreement, the Company and Iliad exchanged the Original August Note of $245,000 for a new promissory note in the original principal amount of $272,250 (the “Exchange Note”), which balance includes an exchange fee of $24,750. The Company evaluated the Exchange Agreement under ASC 470-50-40 “Extinguishments of Debt” (“ASC 470”), noting it met the criteria for substantial modification under ASC 470, and accordingly treated the Exchange Agreement as an extinguishment of debt and recorded a loss of extinguishment of debt of $54,225. The related derivative liability was also extinguished. The Exchange Note was issued in substitution of and not in satisfaction of the Original August Note.
The Exchange Note provided that the Company was to make the following payments to Iliad: (a) a payment in shares of the Company’s common stock within three trading days of June 15, 2016 based on a note conversion amount of $50,000 and a conversion price that was equal to 70% of the average of the three lowest closing bid prices of the Company’s common stock in the twenty trading days immediately preceding such conversion (this payment of shares was not made by the Company as a result of a subsequent note amendment); and (b) a payment equal to the remaining aggregate outstanding balance of the Exchange Note on or before July 15, 2016, which payment must be made in cash. The Company identified an embedded derivative liability in the Exchange Note with an original estimated fair market value of $29,475 and recorded this as a derivative liability.
11
On July 15, 2016, the Company entered into a second Exchange Agreement (the “Second Exchange Agreement”) with Iliad. Pursuant to the Second Exchange Agreement, the Company and Iliad exchanged the Exchange Note for a new promissory note in the original principal amount of $81,632 (the “Second Exchange Note”), which balance includes an exchange fee of $2,500. The Second Exchange Note was issued in substitution of and not in satisfaction of the Exchange Note. The Company evaluated the Exchange Amendment dated July 15, 2016 to the Exchange Agreement dated May 12, 2016 under ASC 470-50-40 “Extinguishments of Debt” (“ASC 470”), noting it met the criteria for substantial modification under ASC 470, and accordingly treated the Exchange Agreement as an extinguishment of debt and recorded a loss of extinguishment of debt of $42,198.
The Second Exchange Agreement and related Second Exchange Note restructured the payment provisions of the Exchange Note. The Second Exchange Note provides that the Company is to make to Iliad a payment equal to the remaining aggregate outstanding balance of the Second Exchange Note on or before July 15, 2017, which payment must be made in cash. Interest accrues on the outstanding balance of the Second Exchange Note at a rate of 10% per annum; provided, however that if the Company fails to repay the Second Exchange Note when due, or if the Company is otherwise in default under the Second Exchange Note, at the option of Iliad a default interest rate of 18% per annum will apply. In the event the Company is in default under the Second Exchange Note, Iliad also has the option to accelerate the note with the outstanding balance becoming immediately due and payable at an amount equal to 115% of the outstanding balance of the Second Exchange Note as of the date the event of default occurred. The Second Exchange Note may be prepaid without penalty at any time.
The Second Exchange Note provides that, until the Second Exchange Note has been paid in full, Iliad may convert all or part of the outstanding note balance (the “Conversion Amount”) into shares of common stock of the Company at the Conversion Price (as defined below). Notwithstanding the foregoing, the Company has the option to pay the Conversion Amount in cash in lieu of delivering shares of its common stock. As used, “Conversion Price” means a price per share equal to 70% of the average of the three lowest closing bid prices of the Company’s common stock in the twenty trading days immediately preceding the applicable conversion. The Second Exchange Note provides that the Company may not issue shares to Iliad under the Second Exchange Note if the issuance of such shares would cause Iliad to beneficially own more than 9.99% of the Company’s outstanding common stock. The Company determined that the conversion feature of the Second Exchange Note meets the definition of an embedded derivative that should be separated and accounted for as a derivative liability. See Note 10 for a discussion relating to derivative liability.
As of November 14, 2016, the outstanding balance on the Second Exchange Note was $0.
TCA Global Credit Master Fund, LP Note December 2015
On December 24, 2015, the Company entered into a Senior Secured Credit Facility Agreement (the “Loan Agreement”) with TCA Global Credit Master Fund, LP (“TCA”). At the initial closing on December 24, 2015, the Company issued to TCA a Convertible Promissory Note in the principal amount of $750,000 (the “TCA Note”). The TCA Note is scheduled to mature on June 24, 2017 (the “Maturity Date”). At any time prior to the Maturity Date or the earlier termination of the Loan Agreement, the Company can request up to $9,250,000 of additional loans, which additional loans may be made in the sole discretion of TCA. The Company may prepay borrowings at any time, in whole or in part, without penalty. Upon origination, the Company recorded a debt discount of $706,911 and amortized $223,791 during the year ended June 30, 2016, leaving an unamortized balance of $483,120. For the three months ended September 30, 2016, the Company incurred an amortization expense of $126,031, leaving an unamortized balance of $357,089 at the end of the period.
The loan will accrue interest on the unpaid principal balance at an annual rate of 18%. The Company made interest only payments of $11,250 on each of January 24, February 24 and March 24, 2016, and thereafter, will make payments of approximately $56,208 of principal and interest per month until the Maturity Date. In the event the Company is in default under the loan agreement with TCA or any related transaction document, including as a result of a default in the Company’s payment obligations, any amount due to TCA under the facility will, at TCA’s option, bear interest from the date due until such past due amount is paid in full at an annual rate of 22%. In addition, upon the occurrence and during the continuance of an event of default under the transaction documents, TCA may terminate its commitments to the Company and declare all of the Company’s obligations to TCA to be immediately due and payable.
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While the Note is outstanding, but only upon the occurrence of (i) an event of default under the loan agreement with TCA or any related transaction document or (ii) the Company’s mutual agreement with TCA, TCA may convert, subject to certain beneficial ownership limitations, all or any portion of the outstanding principal, accrued and unpaid interest and any other sums due and payable under the Note or any other transaction document (such total amount, the “Conversion Amount”) into a number of shares of the Company’s common stock equal to: (i) the Conversion Amount divided by (ii) eighty-five percent (85%) of the lowest of the daily volume weighted average price of the Company’s common stock during the five business days immediately prior to the conversion date (the “Conversion Shares”). Upon liquidation by TCA of Conversion Shares, if TCA realizes a net amount from such liquidation equal to less than the Conversion Amount, the Company is obligated to issue to TCA additional shares of the Company’s common stock equal to: (a) the Conversion Amount minus the net realized amount, divided by (b) the average volume weighted average price of the Company’s common stock during the five business days immediately prior to the date upon which TCA requests additional shares. The Company accounted for the conversion feature as a derivate liability.
The payment and performance of all the Company’s indebtedness and other obligations to TCA, including all borrowings under the loan agreement and related agreements, are secured by liens on substantially all of the Company’s assets pursuant to a Security Agreement.
Of the proceeds received at the initial closing, approximately $106,000 was used to pay in full all indebtedness outstanding under the Company’s Business Loan and Security Agreement with B of I Federal Bank (the “Bank”), entered into on November 3, 2015. Upon repayment of the Company’s indebtedness under the Business Loan and Security Agreement, the Bank released its liens on the Company’s assets. After the payment of approximately $51,000 of fees and cash expenses to TCA in connection with the loan transaction, the Company received net proceeds of approximately $593,000. As of September 30, 2016 the outstanding balance of the TCA Note was $505,432.
In connection with the Loan Agreement, the Company agreed to pay to TCA a fee for advisory services provided to the Company prior to the entry into the Loan Agreement in the amount of $126,000 (the “Advisory Fee”). As partial payment of the Advisory Fee, the Company issued to TCA 3,810,000 shares of the Company’s common stock on December 24, 2015 (the “Advisory Fee Shares”), representing 4.99% of the Company’s issued and outstanding shares of common stock on such date. In the event that TCA receives net proceeds from the sale of such shares that are less than the Advisory Fee, TCA may require the Company to issue additional shares of common stock in an amount sufficient such that, when sold and the net proceeds from such sale are added to the net proceeds from the sale of any of the previously issued and sold Advisory Fee Shares, TCA shall have received total net funds equal to the Advisory Fee. Notwithstanding the foregoing, subject to certain conditions, the Company has the right to redeem the Advisory Fee Shares then in TCA’s possession for an amount payable in cash equal to the Advisory Fee, less any net cash proceeds received by TCA from previous sales of Advisory Fee Shares. In the event TCA has not realized net proceeds from the sale of Advisory Fee Shares equal to at least the Advisory Fee by the earlier to occur of: (i) December 24, 2016; (ii) the occurrence of an event of default under the transaction documents; or (iii) the Maturity Date, then at any time thereafter, TCA has the right to require the Company to redeem all of the Advisory Fee Shares then in TCA’s possession for cash equal to the Advisory Fee, less any cash proceeds received by TCA from any previous sales of Advisory Fee Shares. The Advisory Fee was recorded as a deferred finance fee of $126,000 and the Company amortized $42,000 during the year ended June 30, 2016, leaving an unamortized balance of $84,000. During the three months ended September 30, 2016, the Company amortized $21,913, leaving an unamortized balance of $62,087 at the end of the period. The Company determined that the Conversion feature of the TCA Note and the Advisory Fee meets the definition of an embedded derivative that should be separated and accounted for as a derivative liability. See Note 10 for a discussion relating to derivative liability.
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NOTE 8 –NOTES PAYABLE
Note Holder | Balance 9/30/2016 |
| Unamortized Original Issue Discount |
| Balance, net of Discount 9/30/2016 |
Calco Commercial Insurance | $ 47,570 |
| $ - |
| $ 47,570 |
AFCO Insurance | 80,315 |
| - |
| 80,315 |
Bank of the West - short term portion | 7,211 |
| - |
| 7,211 |
Total Short Term Notes Payable | $ 135,096 |
| $ - |
| $ 135,096 |
|
|
|
|
|
|
Bank of the West - long term portion | $ 21,587 |
| $ - |
| $ 21,587 |
Total Long Term Notes Payable | $ 21,587 |
| $ - |
| $ 21,587 |
Bank of the West
On December 29, 2014, Kyle Winther, the Company’s CEO, entered into a vehicle financing agreement with the Bank of the West. Pursuant to the agreement, the amount financed was $39,275, payable in 48 monthly payments plus accrued interest at a rate of 3.9%, with monthly payments of $614 and a maturity date of December 29, 2018. In January 2015, the Company agreed to assume the payments on this loan and capitalized the vehicle. As of September 30, 2016 the outstanding balance was $28,798, with $7,211 and $21,587 classified as short term and long term, respectively. As of June 30, 2016 the outstanding balance was $30,348, with $7,211 and $23,137 classified as short term and long term, respectively.
Other Short Term Facilities
Effective July 10, 2016, the Company entered into an Agreement to finance its annual General Liability insurance coverage. The insurance coverage is provided through Calco Commercial Insurance. The amount of the policy is $77,240 with $59,072 being financed at 8% over 10 months with a monthly payment of $6,126. The Company made a down payment on the policy of $18,168. At September 30, 2016, the remaining premium obligation due under the Agreement was $47,570.
As of August 22, 2016, the Company entered into an insurance contract with Lloyds of London financed by AFCO for Director’s and Officer’s insurance coverage. The amount of the policy is $109,392 with $90,100 being financed at 6.85% over 9 months with a monthly payment of $10,299. The Company made a down payment on the policy of $19,292. At September 30, 2016, the remaining balance was $80,315.
NOTE 9 – NET INCOME (LOSS) PER COMMON SHARE
A summary of net income (loss) and shares used to compute net income (loss) per share for the three months ended September 30, 2016 and 2015 is as follows:
Dilutive shares for the three months ended September 30, 2016 of 69,856,556 are related to the TCA Global Loan Payable, TCA Advisory Fee and the Iliad Co Loan Payable.
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NOTE 10 – DERIVATIVE LIABILITIES
The Company evaluated the TCA Note, the TCA Advisory Fee and the Iliad Note under the requirements of ASC 480 “Distinguishing Liabilities from Equity” and concluded that the notes and advisory fee do not fall within the scope of ASC 480.
In relation to the conversion provisions of the TCA Note, the TCA Advisory Fee and the Iliad Note, the Company determined that the conversion features do not meet the definition of “indexed to” the Company’s stock, and the scope exception to ASC 815’s derivative accounting provisions do not apply. The Company also determined that the conversion features of the TCA Note, the TCA Advisory Fee and the Iliad Note meet the definition of an embedded derivative that should be separated from the TCA Note, TCA Advisory Fee and the Iliad Note, respectively and accounted for as a derivative liability.
The Company recorded an original valuation for the TCA Note of $706,911 for the derivative liability. As of September 30, 2016, the Company had a derivative liability for the TCA Note of $353,939.
The Company recorded an original valuation for the TCA Advisory Fee of $23,130 for the derivative liability. As of September 30, 2016, the Company had a derivative liability for the TCA Advisory Fee of $84,471.
The Company recorded an original valuation for the Iliad Note of $29,475 for the derivative liability. As of June 30, 2016, the Company had a derivative liability for the Iliad Note of $111,940. On July 15, 2016, the Iliad Note was extinguished in exchange for a new Note. The Company recorded an original valuation for the July 15, 2016 Iliad Note of $74,112 for the derivative liability. As of September 30, 2016, the Company had a derivative liability for the new Iliad Note of $65,478.
The Company has recorded the fair value of each derivative as described above as a current liability as of September 30, 2016. The change in fair value of $366,194 was recorded as other income (expense) in operations for the three months ended September 30, 2016.
In arriving at fair-value estimates, the Company utilizes the most observable inputs available for the valuation technique employed. If a fair-value measurement reflects inputs at multiple levels within the fair value hierarchy, the fair-value measurement is characterized based upon the lowest level input. For the Company, recurring fair-value measurements are performed for the derivative liability.
The Company does not have any liabilities that reduce risk associated with hedging exposure and has not designated the derivative liability as a hedge instrument.
The Company did not have any derivatives valued using Level 1 and Level 2 inputs as of September 30, 2016. The Company categorized the derivative liability as Level 3 using the Black-Scholes pricing model with a fair value of $503,887 as of September 30, 2016.
The Company used the following input ranges: stock price $0.0037-$0.0109; expected term 0.0027-1.000 years; risk-free rate 0.29%-0.59%; and volatility 160.0%-187.77%. Unobservable inputs were the prevailing interest rates, the Company’s stock volatility and the expected term.
There have been no transfers between Level 1, Level 2, or Level 3 categories. Level 3 as of June 30, 2016 was $827,883; Level 3 additions for the three months ended September 30, 2016 were a $(366,194) valuation adjustment and a $42,198 adjustment related to extinguishment of debt at September 30, 2016; Level 3 at September 30, 2016 was $503,887.
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NOTE 11 – EQUITY
Issuance of Common Stock
The Company issued to Typenex Co-Investment, LLC shares of its common stock as partial payment of the Company’s outstanding debt obligations to Typenex as follows (see Note 7):
Date of Issuance | Number of Shares of Common Stock | Conversion Price | Consideration |
August 5, 2016 | 118,456 | $0.014467 | Issuance of true up shares in connection with debt conversion on March 15, 2016. |
August 5, 2016 | 3,313,612 | $0.007723 | Issuance of true up shares in connection with debt conversion on April 15, 2016. |
Except as described below, the Company knows of no material existing or pending legal proceedings against the Company, nor is it involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of the Company’s directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to the Company’s interest.
On November 4, 2015, the Company filed a lawsuit in the Superior Court of California, County of Orange, Case Number 30-2015-00818492-CU-BC-CJC against Kevin Crump, an individual, Magnavape, Inc. and Magnavon, Inc. alleging breach of contract, fraud, negligent misrepresentation, intentional interference with economic advantage and negligent interference with economic advantage relating to the production by the defendants of the Company’s AR Mods. The lawsuit prayer is for $3,000,000. This amount includes general damages, lost profits and punitive damages against the defendants. A mandatory settlement conference is scheduled for February 24, 2017 and a jury trial is scheduled for March 27, 2017.
On January 28, 2016, Darin Dyroff, an individual, filed a lawsuit in the Superior Court of the State of California, County of San Luis Obispo, Case Number 16CV-0047 against Vip Vapor Shop & Lounge, Kennedy Enterprises, and Does 1-100. Vapor Hub was served with the Complaint by Dyroff on July 18, 2016. The Complaint asserts causes of action for strict products liability and negligent products liability and the defendant is seeking damages for pain and suffering, mental and emotional distress, future medical care, loss of earnings, lost earnings capacity, property damage, punitive damages, and costs of suit. On September 23, 2016, Steam Distribution, LLC, a defendant in the case, filed a Cross-Complaint against Vapor Hub. The case has been remitted to the Company’s product liability insurance carrier and is being handled by them. The insurance company agreed to defend Vapor Hub under its insurance policy subject to the satisfaction of the policy’s $10,000 deductible. The company does not know the potential exposure on the claim, but believes its exposure is immaterial.
NOTE 13 – SUBSEQUENT EVENTS
Subsequent to September 30, 2016, the Company paid all accrued interest and remaining principal on the Second Exchange Note, and the balance of the Exchange Note as of November 21, 2016 is $0.
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Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with our Unaudited Condensed Financial Statements and the related Notes thereto contained in Part I, Item 1 of this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report, as well as in our Annual Report on Form 10-K for the year ended June 30, 2016 (“Annual Report”) and in our other filings with the SEC, which discuss our business in greater detail.
This Quarterly Report contains forward-looking statements that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statements that do not directly relate to historical or current fact. We use words such as “anticipates,” “believes,” “plans,” “expects,” “future,” “intends,” “may,” “should,” “estimates,” “predicts,” “potential,” “continue,” “becoming,” “transitioning,” and similar expressions to identify such forward-looking statements. Our forward-looking statements include statements as to our business outlook, revenues, margins, expenses, tax provision, capital resources sufficiency, capital expenditures and cash commitments. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those referenced in Part I, Item 1A of our Annual Report and similar discussions in our other SEC filings. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
General Overview
On February 14, 2014, we entered into a Share Exchange Agreement with Vapor Hub Inc., a California corporation (“Vapor”), Delite Products, Inc., a California corporation (“Delite”) and the shareholders of both companies (the “Exchange Agreement”). As a result of the closing of the transactions contemplated by the Exchange Agreement, Vapor and Delite became our wholly owned subsidiaries and we now carry on the business of developing, producing, marketing and selling vaping devices and related accessories. On May 18, 2015, Vapor and Delite were merged with and into the Company, ending the separate existences of Vapor and Delite. This had no impact on the historical financial statements.
Our principal executive office is located at 1871 Tapo Street Simi Valley, CA 93063. The telephone number at our principal executive office is (805) 309-0533.
Business Overview
Product Description
Vaping devices (as well as electronic cigarettes, also known as e-cigarettes) are battery-powered products that allow users to inhale water vapor instead of the smoke, ash, tar and carbon monoxide associated with traditional cigarettes. In contrast to e-cigarettes, vaping devices are often precision manufactured from metallic materials and do not look like traditional cigarettes. Vaping devices, as compared to e-cigarettes, also offer a unique user experience as a result of greater vapor production, enriched taste, and an ability to highly customize a device with different mechanical components and fashionable accessories, including different colors and finishes.
Sourcing
We use third party contract manufacturers to produce and finish our vaping devices (“Mods”), including our Limitless Mechanical Mod, from facilities located in both Southern California and China. Our Mods, which are made from a metallic material such as steel, brass or copper, are custom machined to meet our design specifications. Once machined, unfinished products are delivered to our location in Simi Valley or to a third party service provider to be buffed, polished and to add various treatments and embellishments, such as paint and engravings. Finished products are then held in inventory for distribution and sale. In the quarter ended September 30, 2016, we relied on three manufacturers to produce all of our Mods. Although we have relied on a limited number of manufacturers to machine our Mods, we believe manufacturing capacity is available to meet our current and planned needs. We do not currently have any long term agreements in place for the manufacture of our Mods.
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With respect to our custom designed atomizers which we market and distribute globally, in our quarter ended September 30, 2016, we sourced these products from one manufacturer located in the United States. We believe that suppliers for our atomizers are available to meet our current and planned needs.
We source our proprietary E-liquids (such as our Binary Premium E-Liquid) from an ISO Class 7 certified manufacturer in the USA, which helps ensure their purity and quality. In addition to sourcing our own e-liquids, we also purchase e-liquid from other reputable American suppliers for resale through our distribution channels.
Product Distribution
Products distributed by the Company include vaping devices and related accessories purchased from third parties for resale as well as our own vaping devices and related accessories, which we design and source, including our popular “Limitless Mechanical Mods”, “Limitless Box Mod” and “Limitless Atomizer”, as well as “Binary Premium e-Liquid”.
We market and sell our vaping devices and related products to end customers through our website www.vapor-hub.com, to retail stores through direct sales both in the United States and internationally, and through third party wholesalers both in the United States and internationally who then resell our products to retailers in their territory. Retailers of our products include vaping shops throughout the United States and in approximately 23 other countries. We also distribute our products on a limited basis through convenience stores and gas stations. In 2016, approximately 28% of our sales were to customers outside of the United States.
With respect to vaping devices and related products that we sell through third party wholesalers, we typically sell our products to these wholesalers for their re-sale on a non-exclusive basis and we also typically do not have long term contractual arrangements with any of our wholesalers.
Operation of Retail Stores
We sell our products and those of third parties to end consumers directly through our retail location located in Simi Valley, California. Through our retail location, we sell and market vaping devices as well as e-liquid, accessories, and supplies relating to vaping devices to both novice users as well as consumers who demand high end technical devices. October 15, 2015, we closed a second retail location that we previously operated in Chatsworth, California and we have no plans to open additional stores.
We opened our retail locations in order to create brand recognition for our products and also to enable us to gather information about user preferences in the rapidly evolving vaping industry. In 2016 and 2015, our retail sales accounted for approximately 6.6% and 10% of our revenue, respectively.
New FDA Regulations
On May 5, 2016, the U.S. Food and Drug Administration (“FDA”) issued a final rule deeming certain products to be subject to the Federal Food, Drug, and Cosmetic Act and regulations thereunder (the “FD&C Act”), which products include electronic cigarettes and their component parts, including e-liquids, atomizers, batteries, cartomizers, tank systems, flavors, vials that contain e-liquids and programmable software. On August 8, 2016, the newly deemed products became subject to all provisions of the FD&C Act and FDA regulations applicable to cigarettes, cigarette tobacco and other tobacco products. However, for certain provisions that require labeling changes or information submission to the FDA, the FDA has provided an extended compliance period. Among other requirements, under the new rules:
·
The sale of covered tobacco products to individuals under the age of 18 is prohibited beginning August 8, 2016;
·
Vending machine sales of covered tobacco products are prohibited unless sold in adult-only facilities beginning August 8, 2016;
·
The newly deemed products will be subject to rules and regulations relating to adulterated or misbranded products beginning August 8, 2016, including rules that prohibit the sale and distribution of products with modified risk descriptors (such as “light”, “low” and “mild”) unless authorized by the FDA;
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·
The distribution of free samples of the newly deemed tobacco products is prohibited as of August 8, 2016;
·
Companies that own or operate domestic manufacturing establishments engaged in the manufacturing of newly deemed tobacco products are required to register with the FDA and submit details about their products beginning August 8, 2016;
·
Subject to certain exceptions, packaging and advertisements of all covered tobacco product will be required to bear an addictiveness warning beginning May 10, 2018; and
·
Newly deemed tobacco products that were not commercially marketed in the United States as of February 15, 2007 or any modification (including a change in design, any component, any part, or any constituent or in the content, delivery or form of nicotine, or any other additive or ingredient) of a tobacco product where the modified product was commercially marked in the United States after February 15, 2007 are required to have premarket authorization prior to commercial distribution.
The FDA process to obtain pre-market authorization will be phased in. For newly deemed tobacco products that were on the market as of August 8, 2016, but that were not on the market as of February 15, 2007, FDA is providing two compliance periods: one for submission to the FDA of applications and one for obtaining premarket authorization. During these compliance periods, the FDA does not intend to take enforcement action for products remaining on the market without authorization. New products for which no application has been submitted by August 8, 2018 will be subject to enforcement. With certain exceptions, newly deemed tobacco products for which timely premarket submissions have been submitted will be subject to an additional compliance period of twelve months after the initial compliance period for submissions ends. Once the continued compliance period ends, new tobacco products on the market without authorization will be subject to enforcement. For newly deemed tobacco products that were not on the market as of August 8, 2016, the above compliance periods will not apply and the new products must obtain a marketing order from FDA specific to the product prior to commercial distribution.
As a result of the new regulations, we will have until August 8, 2018 to submit applications to obtain approval to continue to sell our products in the United States which were on the market as of August 8, 2016. We may continue to sell these existing products during this two-year period and, provided we timely submit applications, we can continue to sell existing products for an additional year while the FDA reviews our applications. Failure to submit applications for any of our existing products would prevent us from marketing and selling such products in the United States beginning in August 2018.
We believe our costs to comply with the new regulations will be substantial, both in terms of management time and out of pocket expenditures. Moreover, if we elect not to obtain or are unable to secure pre-market authorization to continue selling our existing products and any new products targeted for introduction, our future sales in the United States will be adversely impacted. We plan to further evaluate the impact of the new rules and regulations on our business and modify our business strategies accordingly to comply with the new rules and regulations. However, we cannot guarantee that we will be able to comply with the new rules and regulations, particularly the premarket authorization requirement, and the new legislation (including penalties imposed for failure to comply) could have a material adverse effect on our business, results of operations and financial condition.
Going Concern
Our unaudited condensed financial statements have been presented on the basis that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Our cash balance as of September 30, 2016 and our working capital deficit along with other factors raise substantial doubt about our ability to continue as a going concern. The accompanying condensed financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our possible inability to continue as a going concern.
We continue to face liquidity and capital resources constraints. We do not believe that the proceeds from our existing financing facilities along with our operating cash flows will be sufficient to meet our financing needs for the next twelve months, and the extent of our future capital requirements will depend on many factors, including results of operations and the growth rate of our business. Our near term objective is to raise debt or equity capital to fund our immediate cash needs and to finance our longer term growth. We are also pursuing various means to increase revenues, reduce operating costs and to improve cash flow.
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Critical Accounting Policies and Estimates
We prepare our condensed financial statements in accordance with U.S. GAAP. The preparation of financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statements presentation, financial condition, results of operations, and cash flows will be affected. Please refer to Note 2 “BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” for further discussion.
Recently Issued Accounting Pronouncements
Please see Note 2 for a discussion of recent accounting pronouncements.
Results of Operations
Comparison of the Three Months Ended September 30, 2016 to the Three Months Ended September 30, 2015
The following is a summary of our results from operation for the three month periods ended September 30, 2016 and September 30, 2015:
|
|
|
|
| Three Months Ended, September 30, 2016 |
| Three Months Ended September 30, 2015 |
Revenues, net | $ 2,495,222 |
| $ 1,962,345 |
Cost of revenues | 1,559,097 |
| 1,203,842 |
Gross profit | 936,125 |
| 758,503 |
General and administrative expenses | 665,656 |
| 701,741 |
Net income from operations | 270,469 |
| 56,762 |
Other income (expense) | 96,656 |
| (130,115) |
Income (loss) before taxes | 367,125 |
| (73,353) |
Income tax provision | 800 |
| 800 |
Net income (loss) | $ 366,325 |
| $ (74,153) |
Revenues: Revenues are comprised of royalties and gross sales less returns and discounts. During the three months ended September 30, 2016, we generated $70,000 in royalty income and merchandise sales of $2,425,222 (net of returns adjustments and discounts of $5,820). For the three months ended September 30, 2015, we generated merchandise sales of $1,962,345 (net of returns adjustments and discounts of $8,752). The increase in revenues compared to the prior year period primarily results from growth of our wholesale distribution and direct distribution to retail store sales. We anticipate that revenues will significantly decline in the second quarter as a result of a dispute with one of our Mod manufacturers which has resulted in inventory not being readily available for sale.
Cost of Revenues: Our cost of revenue primarily represents the cost of our outsourced manufacturing of our products and also the cost of purchasing products from third parties for resale. Generally, our cost of revenue is lower on products that we directly source and is higher when we purchase products for resale from third parties. During the three months ended September 30, 2016 and 2015, our cost of revenue was $1,559,097 and $1,203,842, respectively. The increase in cost of revenues during the three months ended September 30, 2016 compared to the prior year period is primarily attributable to our increased revenues.
Gross Profit: Gross profit represents revenue less the cost of revenue. During the three months ended September, 2016, our gross profit was $936,125 and during the comparable prior year period ended September 30, 2015 was $758,503. Our gross margin (which is gross profit as a percentage of revenue) for the three months ended September 30, 2016 was 37.5% compared to 38.7% for the prior year period.
20
General and Administrative Expense: General and administrative expenses consist primarily of payroll and related costs, sales and marketing costs, infrastructure costs and costs associated with being a public reporting company. During the three months ended September 30, 2016, we incurred general and administrative expenses of $665,656 and in the comparable prior year period ended September 30, 2015 we incurred general and administrative expenses of $701,741. The decrease in general and administrative expense during the three months ended September 30, 2016 compared to the prior year period results primarily from decreases in payroll. Our general and administrative expenses as a percentage of sales was 26.7% and 35.8% for each of the three months ended September 30, 2016 and 2015, respectively. We are continuing to evaluate our general and administrative expenses in an effort to reduce costs and improve our future profitability and cash flow.
Other income (expense): Other income of $96,656 for the three months ended September 30, 2016 consists of a positive change in fair value of derivative liability of $366,194 associated with our credit facilities offset by interest expense of $33,273 incurred in connection with our credit facilities, amortization of finance fees of $35,364, interest expense-amortization of debt discount of $126,031 and loss on extinguishment of debt related to a retired Typenex Co-Investment, LLC and Iliad Research & Trading, L.P. loans of $74,870. During the comparable period in 2015, we had other expense of $130,115 consisting of $32,686 in interest expense, amortization of finance fees of $9,765, interest expense-amortization of debt discount of $42,181 and a change in fair value of derivative liability of $45,483.
Net Income (Loss): Net income was $366,325 for the three months ended September 30, 2016 and the net loss was $74,153 for the three months ended September 30, 2015 for the reasons discussed above.
Seasonality
Our operating results and operating cash flows tend to be lower in the three month period ending December 31, compared to other periods during the year, as a result of the purchasing patterns of our customers.
Liquidity and Capital Resources
As of September 30, 2016, we had cash of $85,942 and working capital deficit of $526,194 and as of June 30, 2016, we had cash of $607,960 and a working capital deficit of $934,884. This working capital amount includes debt discounts which offset to the balance of convertible notes payable. The working capital deficit, adjusted to exclude debt discounts, was $1,083,887 and $1,551,170 as of September 30, 2016 and June 30, 2016, respectively. We depend on cash from financing activities to fund our operating activities, and we expect this trend to continue as we continue to grow our operations. A summary of our net working capital as of September 30, 2016 and as of June 30, 2016, and our cash flows for the three months ended September 30, 2016 and 2015 are summarized in the following tables:
21
Cash Flows |
|
|
|
| ||
|
| Three Months Ended September 30, 2016 | Three Months Ended September 30, 2015 | |||
Net cash used in Operating Activities |
| (147,675) | (106,007) |
| ||
Net cash used in Investing Activities |
| - | (5,734) |
| ||
Net cash used in Financing Activities |
| (374,343) | (80,229) |
| ||
Decrease in Cash during period |
| (522,018) | (191,970) |
| ||
Cash, Beginning of Period |
| 607,960 | 351,081 |
| ||
Cash, End of Period |
| 85,942 | 159,111 |
| ||
Operating Activities
Net cash used in operating activities was $147,675 for the three months ended September 30, 2016. Net cash used by operating activities was $106,007 for the three months ended September 30, 2015. Net cash used in operations for the period ended September 30, 2016 primarily results from inventory purchases, an increase in prepaid expenses, change in derivative liability and a decrease in accounts payable and accrued expenses offset by net income, an increase in amortization of debt discount and deferred income. Net cash used in operations for the three months ended September 30, 2015 primarily results from our net loss, a decrease in deferred income and an increase in inventory offset by an increase in accounts payable and accrued expenses, change in derivative liability, an increase in amortization of debt discount on short term note and amortization of deferred finance costs.
Investing Activities
Net cash used in investing activities was $0 for the three months ended September 30, 2016. For the three months ended September 30, 2015, net cash used in investing activities was $5,734 which consists of the purchase of property and equipment.
Financing Activities
Net cash used in financing activities was $374,343 for the three months ended September 30, 2016 and $80,229 for the three months ended September 30, 2015. For the three months ended September 30, 2016, net cash used in financing activities primarily consisted of proceeds from affiliate loans of $47,718 offset by payments for convertible notes payable of $393,977, payments on affiliate loans of $4,850, payments on financed insurance premiums of $21,287, payments on auto loan of $1,551 and payments on leased property of $396. For the three months ended September 30, 2015, net cash used in financing activities consisted of payments on convertible loans of $105,469, payments on short term notes payable of $86,003, payments on financed insurance premiums of $32,507, payments for deferred finance costs $17,500, payments on auto loans of $1,491, payments on affiliate loans of $36,188 and payments on leased property loans of $1,071 offset by proceeds from short term notes payable of $200,000.
Future Capital Requirements
We continue to face liquidity and capital resources constraints and do not believe that the proceeds from our debt facilities along with our operating cash flows will be sufficient to meet our financing needs for the next twelve months. The extent of our future capital requirements will depend on many factors, including our results from operations and the growth rate of our business. Our near term objective is to raise debt or equity capital to fund our immediate cash needs and to finance our longer term growth. We are also pursuing various means to increase revenues, reduce operating costs and to improve overall cash flow.
Although our near term objective is to raise capital to fund our immediate cash needs and to finance our longer term growth, there can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain additional financing on a timely basis, we may not be able to grow our operations as planned, may not be able to meet our other obligations as they become due and may ultimately be forced to restructure or cease our operations.
22
If we are successfully able to raise capital, the issuance of additional equity securities by us could result in significant dilution in the equity interests of our current stockholders and if capital is raised through debt facilities, such facilities will increase our liabilities and future cash commitments, and may also impose restrictive covenants relating to the operation of our business.
We presently do not have any arrangements for additional financing and will continue to evaluate various financing strategies to support our current operations and fund our future growth.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company”, we are not required to provide the information required by this Item.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, our management, with the participation of our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal accounting officer and principal financial officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2016, the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were not effective to ensure that information that is required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
The Company's management identified material weaknesses in its internal control over financial reporting related to the following matters:
·
A lack of sufficient segregation of duties. Specifically, this material weakness is such that the design over these areas relies primarily on defective controls and could be strengthened by adding preventative controls to properly safeguard Company assets.
·
A lack of sufficient personnel in the accounting function due to the Company's limited resources with appropriate skills, training and experience to perform certain tasks as it relates to financial reporting.
·
A lack of formally documented policies and procedures, which provide for an ineffective control environment.
The Company's plan to remediate those material weaknesses is as follows:
To improve the effectiveness of the accounting group, the company uses the firm of Winther and Company CPA’s to augment existing resources, to improve segregation procedures and to assist in the analysis and recording of complex accounting transactions. The Company also hired a full-time accounting manager to maintain the Company’s books and records under the supervision of the CFO. The Company plans to further mitigate its accounting deficiencies by hiring additional personnel in the accounting department once it generates significantly more revenue, or raises significant additional working capital.
23
The company is also in the process of adopting specific internal control mechanisms with its Board of Directors’ and executive officers’ collaboration to ensure effectiveness as the company grows. Future controls, among other things, will include more checks and balances and communication strategies between the management and the Board of Directors to ensure efficient and effective oversight over company activities as well as more stringent accounting policies to track and update the company’s financial reporting.
Changes in Internal Controls over Financial Reporting
Other than as described above, there was no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the three months ended September 30, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
24
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Except as described below, we know of no material existing or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our interest.
On November 4, 2015, the Company filed a lawsuit in the Superior Court of California, County of Orange, Case Number 30-2015-00818492-CU-BC-CJC against Kevin Crump, an individual, Magnavape, Inc. and Magnavon, Inc. alleging breach of contract, fraud, negligent misrepresentation, intentional interference with economic advantage and negligent interference with economic advantage relating to the production by the defendants of the Company’s AR Mods. The lawsuit prayer is for $3,000,000. This amount includes general damages, lost profits and punitive damages against the defendants. A mandatory settlement conference is scheduled for February 24, 2017 and a jury trial is scheduled for March 27, 2017.
On January 28, 2016, Darin Dyroff, an individual, filed a lawsuit in the Superior Court of the State of California, County of San Luis Obispo, Case Number 16CV-0047 against Vip Vapor Shop & Lounge, Kennedy Enterprises, and Does 1-100. Vapor Hub was served with the Complaint by Dyroff on July 18, 2016. The Complaint asserts causes of action for strict products liability and negligent products liability and the defendant is seeking damages for pain and suffering, mental and emotional distress, future medical care, loss of earnings, lost earnings capacity, property damage, punitive damages, and costs of suit. On September 23, 2016, Steam Distribution, LLC, a defendant in the case, filed a Cross-Complaint against Vapor Hub. The case has been remitted to the Company’s product liability insurance carrier and is being handled by them. The insurance company agreed to defend Vapor Hub under its insurance policy subject to the satisfaction of the policy’s $10,000 deductible. The company does not know the potential exposure on the claim, but believes its exposure is immaterial.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ended September 30, 2016, we issued Typenex Co-Investment, LLC shares of our common stock as partial payment of our outstanding debt obligations to Typenex as follows:
Date of Issuance | Number of Shares of Common Stock | Conversion Price | Consideration |
August 5, 2016 | 118,456 | $0.014467 | Issuance of true up shares in connection with debt conversion on March 15, 2016. |
August 5, 2016 | 3,313,612 | $0.007723 | Issuance of true up shares in connection with debt conversion on April 15, 2016. |
The above issuances were made in reliance upon the exemption from registration provided by Rule 144 of the Securities Act of 1933, as amended.
Other than as described above, we did not sell any equity securities which were not registered under the Securities Act during the quarter ended September 30, 2016 that were not otherwise disclosed on our quarterly reports on Form 10-Q or our current reports on Form 8-K filed during the quarter ended September 30, 2016.
25
Item 6.
Exhibits
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 21, 2016
Vapor Hub International Inc.
(Registrant)
By: /s/ Kyle Winther
Kyle Winther
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Lori Winther
Lori Winther
Chief Financial Officer
(Principal Financial and Accounting Officer)
27
Exhibit 31.1
Certification of Principal Executive Officer Pursuant To
Exchange Act Rules 13a-14(a) and 15d-14(a),
As Adopted Pursuant To
Section 302 of Sarbanes-Oxley Act of 2002
I, Kyle Winther, certify that:
|
|
|
1. | I have reviewed this quarterly report on Form 10-Q of Vapor Hub International Inc.; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; | |
4. | The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: | |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
5. | The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): | |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize, and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
Date: November 21, 2016
/s/ Kyle Winther
Kyle Winther
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
Certification of Principal Financial Officer Pursuant To
Exchange Act Rules 13a-14(a) and 15d-14(a),
As Adopted Pursuant To
Section 302 of Sarbanes-Oxley Act of 2002
I, Lori Winther, certify that:
|
|
|
1. | I have reviewed this quarterly report on Form 10-Q of Vapor Hub International Inc.; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; | |
4. | The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: | |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
5. | The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): | |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize, and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
Date: November 21, 2016
/s/ Lori Winther
Lori Winther
Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 32.1
Certifications of Principal Executive Officer and Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Vapor Hub International Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the knowledge of the undersigned:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 21, 2016
/s/ Kyle Winther
Kyle Winther
Chief Executive Officer
Date: November 21, 2016
/s/ Lori Winther
Lori Winther
Chief Financial Officer
Document and Entity Information |
3 Months Ended |
|---|---|
|
Sep. 30, 2016
shares
| |
| Document and Entity Information: | |
| Entity Registrant Name | VAPOR HUB INTERNATIONAL INC. |
| Document Type | 10-Q |
| Document Period End Date | Sep. 30, 2016 |
| Amendment Flag | false |
| Entity Central Index Key | 0001515718 |
| Current Fiscal Year End Date | --06-30 |
| Entity Common Stock, Shares Outstanding | 90,292,443 |
| Entity Filer Category | Smaller Reporting Company |
| Entity Current Reporting Status | Yes |
| Entity Voluntary Filers | No |
| Entity Well-known Seasoned Issuer | No |
| Document Fiscal Year Focus | 2017 |
| Document Fiscal Period Focus | Q1 |
| Trading Symbol | vhub |
Vapor Hub International Inc. - Condensed Consolidated Balance Sheets - USD ($) |
Sep. 30, 2016 |
Jun. 30, 2016 |
|||||
|---|---|---|---|---|---|---|---|
| Current Assets: | |||||||
| Cash | $ 85,942 | $ 607,960 | |||||
| Accounts Receivable | 4,505 | 880 | |||||
| Inventory | 790,399 | 585,489 | |||||
| Prepaid expenses and other current assets | 229,204 | 38,254 | |||||
| Other current assets | 10,556 | 10,556 | |||||
| Total Current Assets | 1,120,606 | 1,243,139 | |||||
| Fixed assets, net | 126,320 | 134,223 | |||||
| Long term assets | 14,427 | 14,341 | |||||
| Total Assets | 1,261,353 | 1,391,703 | |||||
| Current Liabilities: | |||||||
| Accounts payable and accrued expenses | 614,216 | 828,146 | |||||
| Deferred income | 155,276 | 94,754 | |||||
| Equipment leases payable | 851 | 1,247 | |||||
| Convertible notes payable, net of unamortized debt discount, current | 91,197 | 315,373 | |||||
| Notes payable, net of unamortized debt discount | 135,096 | 7,211 | |||||
| Loans from related parties | 146,277 | 103,409 | |||||
| Derivative liabilities, current | 503,887 | 827,883 | |||||
| Total Current Liabilities | 1,646,800 | 2,178,023 | |||||
| Long Term Liabilities: | |||||||
| Notes payable- long term | 21,587 | 23,137 | |||||
| Long term liabilities | 21,587 | 23,137 | |||||
| TOTAL LIABILITIES | 1,668,387 | 2,201,160 | |||||
| Stockholders' Deficit | |||||||
| Preferred stock | [1] | ||||||
| Common stock | [2] | 90,292 | 86,860 | ||||
| Additional paid-in capital | 808,595 | 775,929 | |||||
| Accumulated deficit | (1,305,921) | (1,672,246) | |||||
| Total Stockholders Deficit | (407,034) | (809,457) | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ 1,261,353 | $ 1,391,703 | |||||
| |||||||
Statement of Financial Position - Parenthetical - $ / shares |
Sep. 30, 2016 |
Jun. 30, 2016 |
|---|---|---|
| Statement of Financial Position | ||
| Preferred Stock, Par Value | $ 0.001 | $ 0.001 |
| Preferred Stock, Shares Authorized | 10,000,000 | 10,000,000 |
| Preferred Stock, Shares Issued | 0 | 0 |
| Preferred Stock, Shares Outstanding | 0 | 0 |
| Common Stock, Par Value | $ 0.001 | $ 0.001 |
| Common Stock, Shares Authorized | 1,010,000,000 | 1,010,000,000 |
| Common Stock, Shares Issued | 90,292,443 | 86,860,375 |
| Common Stock, Shares Outstanding | 90,292,443 | 86,860,375 |
Note 1- Incorporation, Nature of Operations and Acquisition |
3 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Notes | |
| Note 1- Incorporation, Nature of Operations and Acquisition | NOTE 1- INCORPORATION, NATURE OF OPERATIONS AND ACQUISITION
Vapor Hub International Inc. (formerly DogInn, Inc.) (hereinafter known as “the Company”) was incorporated in the State of Nevada on July 15, 2010. On February 14, 2014, the Company entered into a Share Exchange Agreement with Vapor Hub Inc., a California corporation (“Vapor”), Delite Products, Inc., a California corporation (“Delite”) and the shareholders of both companies (the “Exchange Agreement”). As a result of the closing of the transactions contemplated by the Exchange Agreement, Vapor and Delite became the Company’s wholly owned subsidiaries (which subsidiaries were subsequently merged into the Company on May 18, 2015, ending the separate existences of Vapor and Delite) and the Company now carries on the business of developing, producing, marketing and selling the next generation of electronic cigarettes, known as vaping devices, and related accessories, including e-liquids and atomizers. |
Note 2 - Summary of Significant Accounting Policies |
3 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Notes | |
| Note 2 - Summary of Significant Accounting Policies | NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying (a) condensed balance sheet at June 30, 2016 has been derived from audited statements and (b) the condensed unaudited financial statements as of and for the periods ended September 30, 2016 and 2015, have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (“US GAAP”) for complete financial statements, and should be read in conjunction with the audited financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2016 (the “2016 Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) on October 13, 2016. It is management’s opinion, however, that all material adjustments (consisting of normal recurring adjustments), have been made which are necessary for a fair financial statements presentation. The financial statements include all material adjustments (consisting of normal recurring accruals) necessary to make the financial statements not misleading as required by Regulation S-X, Rule 10-01. Operating results for the three months ended September 30, 2016 are not necessarily indicative of the results of operations expected for the year ending June 30, 2017. This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s unaudited condensed financial statements. The unaudited condensed financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to US GAAP and have been consistently applied in the preparation of the unaudited condensed financial statements.
The Company operates in one segment in accordance with accounting guidance Financial Accounting Standards Board (“FASB”) ASC Topic 280, Segment Reporting. The Company’s Chief Executive Officer has been identified as the chief operating decision maker as defined by FASB ASC Topic 280.
Going Concern
The Company’s unaudited condensed financial statements have been presented on the basis that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company’s cash balance as of September 30, 2016, its working capital deficit along with other factors raise substantial doubt about its ability to continue as a going concern. The accompanying unaudited condensed financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
The Company continues to face liquidity and capital resources constraints using $147,675 in cash from operations in the three months ended September 30, 2016 and using $374,343 in financing activities during the same period. The Company does not believe that its operating cash flows will be sufficient to meet its financing needs for the next twelve months. The extent of the Company’s future capital requirements will depend on many factors, including the Company’s results from operations and the growth rate of the Company’s business. The Company’s near term objective is to raise debt or equity capital to fund its immediate cash needs and to finance its longer term growth. The Company is also pursuing various means to increase revenues, reduce operating costs and to improve overall cash flow.
The Company presently does not have any arrangements for additional financing. However, the Company continues to evaluate various financing strategies to support its current operations and fund its future growth.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates significant estimates and assumptions related to its accounts receivable allowance, accounts payable, deferred income tax asset valuation allowances, fair value of derivative liability, fair value of stock and stock options, useful life of fixed assets, recoverability of long lived assets, inventory reserves, estimates of sales return and accrual for potential liabilities. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Concentration of Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash. The Company places its cash with high quality banking institutions. The Company did not have any cash accounts in excess of FDIC insured limits as of September 30, 2016. The Company relied on three manufacturers to make all of the Company’s Mods during the three months ended September 30, 2016 and one manufacturer to make all of the Company’s Mods during the three months ended September 30, 2015.
The Company had a concentration in accounts payable of 45% and 49% to two manufacturers as of September 30, 2016.
Financial Instruments and Fair Value Measurement
Pursuant to ASC 820, Fair Value Measurements and Disclosures, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:
Level 1 - applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 - applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3 - applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The Company’s financial instruments consist principally of cash, accounts payable, accrued liabilities, amounts due to related parties, derivative liabilities and convertible notes payable. Pursuant to ASC 820, the fair value of the Company’s cash is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. Pursuant to ASC 820, the fair value of the Company’s derivative liability is determined based on “Level 3” inputs, which consist of unobservable inputs. The Company believes that the recorded values of all of its other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.
Revenue Recognition
The Company recognizes merchandise revenues when delivery of goods or completion of services has occurred provided there is persuasive evidence of an agreement, acceptance has been approved by its customers, the fee is fixed or determinable based on the completion of stated terms and conditions, and collection of any related receivable is probable. The Company recognizes royalty revenues when products are sold by third parties and collection of any related receivable is probable.
For retail transactions, revenue is recognized at the point of sale. For wholesale and online transactions, revenue is recognized at the time goods are shipped.
Deferred Revenue
The Company accrues deferred revenue when customer payments are received, but product has not yet shipped. As of September 30, 2016 and June 30, 2016, the Company had recorded $155,276 and $94,754, respectively for deferred revenue as a result of prepayments for product made by customers. Those prepayments are recognized into revenue at the point those prepaid products have subsequently shipped. The Company expects to recognize the $155,276 into revenue during the current fiscal year.
Advertising Expense
Advertising costs are expensed as incurred. Advertising expense for the three months ended September 30, 2016 and 2015 were $13,015 and $38,657, respectively and are included in general and administrative expenses.
Deferred Finance Costs, Net
Costs with respect to the issuance of common stock, warrants, stock options or debt instruments by the Company are initially deferred and ultimately offset against the proceeds from such equity transactions or amortized to interest expense over the term of any debt funding, if successful, or expensed if the proposed equity or debt transaction is unsuccessful.
Unamortized finance costs for the three months ended September 30, 2016 and as of June 30, 2016 were $100,302 and $133,166 respectively.
The Company adopted ASU 2015-03 during the quarter ended September 30, 2016, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The Company’s adoption of this ASU did not have a significant impact on the Company’s financial position, results of operations or cash flows. The adoption resulted in a reclassification of deferred finance costs of $100,302 and $133,166 from current assets to offset against convertible notes payable in current liabilities as of September 30, 2016 and June 30, 2016, respectively.
Modification of Debt Instruments
The Company evaluated modifications of debt instruments under ASC 470-50-40 “Extinguishments of Debt” (“ASC 470”). ASC 470 requires modifications to debt instruments to be evaluated to assess whether the modifications are considered “substantial modifications”. A substantial modification of terms shall be accounted for like an extinguishment. For extinguished debt, a difference between the re-acquisition price and the net carrying amount of the extinguished debt shall be recognized currently in income of the period of extinguishment as losses or gains.
Basic and Diluted Net Loss per Share
The Company computes net income per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options, warrants or debentures. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. As of September 30, 2016, there were 69,856,556 dilutive securities related to the convertible notes payable as the Company had net income and as of September 30, 2015, there were no dilutive securities as the Company had incurred a net loss. See Note 9 for further discussion.
Recent Accounting Pronouncements
In August 2016 the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently in the process of evaluating the impact of adoption on its financial statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The Company is currently in the process of evaluating the impact of the adoption on its financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. The ASU will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of adopting this guidance.
In November 2015, the FASB issued ASU 2015-17, which simplifies the presentation of deferred tax assets and liabilities on the balance sheet. Previous GAAP required an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts on the balance sheet. The amendment requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The Company is currently evaluating the potential impact this standard will have on its financial statements and related disclosures.
In September 2015, the FASB issued ASU 2015-16, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This ASU is effective for interim and annual reporting period beginning after December 15, 2016, including interim periods within those fiscal years, with the option to early adopt for financial statements that have not been issued. The Company is currently evaluating the potential impact this standard will have on its financial statements and related disclosures.
In July 2015, the FASB issued ASU 2015-11, which requires an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments apply to inventory that is measured using first-in, first-out (FIFO) or average cost. This ASU is effective for interim and annual reporting periods beginning after December 15, 2016, with the option to early adopt as of the beginning of an annual or interim period. The Company does not expect the adoption of this ASU to have a significant impact on its financial position, results of operations and cash flows.
The Company has reviewed other recent accounting pronouncements issued prior to the date of issuance of its financial statements included in this report, and does not believe any of these pronouncements will have a material impact on its financial statements. |
Note 3 - Officers' Loans Payable |
3 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Notes | |
| Note 3 - Officers' Loans Payable | NOTE 3 – OFFICERS’ LOANS PAYABLE
As of September 30, 2016 and June 30, 2016, the Company had a balance of $146,277 and $103,409 respectively, outstanding as related party loans from Kyle Winther, the Company’s CEO, Lori Winther, the Company’s CFO and Winther & Company, CPAs (an entity owned by Lori Winther, and her husband, Niels Winther, CPA, who is a director of the Company), as well as a Chase Bank Line of Credit (which was extended to the Company, though owed personally by Niels and Lori Winther). The outstanding balances are unsecured, non-interest bearing and repayable upon demand. |
Note 4 - Inventories |
3 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Notes | |
| Note 4 - Inventories | NOTE 4 – INVENTORIES
As of September 30, 2016 and June 30, 2016, the Company had a balance of $790,399 and $585,489, respectively, as inventories which consist of vaping devices, electronic cigarettes, e-liquid, related supplies, and accessories. There was no reserve for inventory obsolescence as of September 30, 2016 and June 30, 2016. |
Note 5 - Lease Commitments |
3 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Notes | |
| Note 5 - Lease Commitments | NOTE 5 – LEASE COMMITMENTS
On February 28, 2015, the Company entered into a lease agreement with landlord Samantha Carrington to provide retail space for its Simi Valley retail location and on April 1, 2015, the Simi Valley retail location opened at the new premises. The lease term extends through March 31, 2017 with a monthly lease payment of $3,190. The Company has a remaining commitment under this lease as of September 30, 2016 of $19,140 and a security deposit of $6,380 was paid to the landlord in relation to this lease.
On September 1, 2015, the Company entered into a Commercial Lease Agreement with the Winther Family Trust, pursuant to which the Company leases property located at 1871 Tapo Street, Simi Valley, CA 93065 (the “Premises”), for a term of 60 months commencing on September 1, 2015. The Company will pay a base rent of $5,650 per month for the duration of the term and also made a security deposit in the same amount. The Company has a remaining commitment under this lease as of September 30, 2016 of $265,550. The Premises replaced the Company’s prior facility located at 67 W. Easy St., Unit 115, Simi Valley, CA 93065 and serves as the Company’s primary office location. In addition to providing office space, the approximately 5,000 square foot facility is also used for warehousing and shipping. The lessor of the Premises, the Winther Family Trust, is controlled by Niels Winther and Lori Winther. Both Niels Winther and Lori Winther are Directors of the Company, and Lori Winther also serves as the Company’s Chief Financial Officer and Secretary.
On September 15, 2015, the Company entered into a lease agreement with Santa Susana Business Center, LLC to lease warehouse and office space at 4685 Runway Street, Unit D, Simi Valley, CA 93063. The lease term extends through September 30, 2017 with a monthly lease payment of $1,716 and increasing to $1,802 on October 1, 2016. The Company has a remaining commitment under this lease of $21,624 as of September 30, 2016 and a security deposit of $1,802 was paid to the landlord in relation to this lease. Rent expense for the three months ended September 30, 2016 and 2015 was $31,668 and $32,952, respectively. |
Note 6 - Related Parties |
3 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Notes | |
| Note 6 - Related Parties | NOTE 6 – RELATED PARTIES
From time to time the Company will engage the services of Winther & Co. an accounting firm owned by the husband of the Company’s CFO. Winther & Co. provides bookkeeping, accounting and tax services to the Company. For the three months ended September 30, 2016 and 2015, the Company incurred approximately $10,156 and $18,262, respectively, in fees with Winther & Co. As of September 30, 2016 and June 30, 2016 the Company had Accounts Payable outstanding to related parties for accounting fees of $0 and $0, respectively.
Reference is also made to the Officer’s Loans Payable described in Note 3 and the Commercial Lease Agreement with the Winther Family Trust described in Note 5. |
Note 7 - Convertible Notes Payable |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Notes | ||||||||||||||||||||||||||||||||||||||||||||||||
| Note 7 - Convertible Notes Payable | NOTE 7 – CONVERTIBLE NOTES PAYABLE
Description of Outstanding Convertible Note Obligations Outstanding as of September 30, 2016
Iliad Co-Investment Note
On August 12, 2015, the Company entered into a Note Purchase Agreement (the “Purchase Agreement”) with Iliad Research & Trading, L.P, a Utah limited liability partnership (“Iliad”), pursuant to which the Company concurrently issued to the investor an unsecured non-convertible Promissory Note in a principal amount of $245,000 (the “Original August Note”). The principal amount includes an original issue discount of $40,000 plus an additional $5,000 to cover the investor’s legal fees, accounting costs, due diligence, monitoring and other transaction costs incurred in connection with the transaction. In consideration for the Original August Note, the investor paid an aggregate cash purchase price of $200,000, computed as follows: $245,000 original principal balance, less the original issue discount of $40,000, and less the transaction costs. The Original August Note was originally scheduled to mature on February 12, 2016 and the Company could prepay all or a portion of the amount owed earlier than it is due without penalty. The original issue discount of $40,000 was recorded as debt discount and fully amortized to interest expense during the fiscal year ended June 30, 2016.
On February 19, 2016, the Company entered into an Amendment to Promissory Note with Iliad which extended the maturity date of the Original August Note to April 12, 2016 and increased the principal amount of the note by $2,500 as consideration for the extension. The Company evaluated the Amendment to Promissory Note under ASC 470-50-40 “Extinguishments of Debt” (“ASC 470”), noting it did not meet the criteria for substantial modification under ASC 470, and accordingly treated the amendment as a modification to the Original August Note, adding $2,500 to the balance and extending the due date under the modified terms.
On May 12, 2016 but effective as of April 15, 2016, the Company entered into an Exchange Agreement with Iliad (the “Exchange Agreement”). Pursuant to the Exchange Agreement, the Company and Iliad exchanged the Original August Note of $245,000 for a new promissory note in the original principal amount of $272,250 (the “Exchange Note”), which balance includes an exchange fee of $24,750. The Company evaluated the Exchange Agreement under ASC 470-50-40 “Extinguishments of Debt” (“ASC 470”), noting it met the criteria for substantial modification under ASC 470, and accordingly treated the Exchange Agreement as an extinguishment of debt and recorded a loss of extinguishment of debt of $54,225. The related derivative liability was also extinguished. The Exchange Note was issued in substitution of and not in satisfaction of the Original August Note.
The Exchange Note provided that the Company was to make the following payments to Iliad: (a) a payment in shares of the Company’s common stock within three trading days of June 15, 2016 based on a note conversion amount of $50,000 and a conversion price that was equal to 70% of the average of the three lowest closing bid prices of the Company’s common stock in the twenty trading days immediately preceding such conversion (this payment of shares was not made by the Company as a result of a subsequent note amendment); and (b) a payment equal to the remaining aggregate outstanding balance of the Exchange Note on or before July 15, 2016, which payment must be made in cash. The Company identified an embedded derivative liability in the Exchange Note with an original estimated fair market value of $29,475 and recorded this as a derivative liability.
On July 15, 2016, the Company entered into a second Exchange Agreement (the “Second Exchange Agreement”) with Iliad. Pursuant to the Second Exchange Agreement, the Company and Iliad exchanged the Exchange Note for a new promissory note in the original principal amount of $81,632 (the “Second Exchange Note”), which balance includes an exchange fee of $2,500. The Second Exchange Note was issued in substitution of and not in satisfaction of the Exchange Note. The Company evaluated the Exchange Amendment dated July 15, 2016 to the Exchange Agreement dated May 12, 2016 under ASC 470-50-40 “Extinguishments of Debt” (“ASC 470”), noting it met the criteria for substantial modification under ASC 470, and accordingly treated the Exchange Agreement as an extinguishment of debt and recorded a loss of extinguishment of debt of $42,198.
The Second Exchange Agreement and related Second Exchange Note restructured the payment provisions of the Exchange Note. The Second Exchange Note provides that the Company is to make to Iliad a payment equal to the remaining aggregate outstanding balance of the Second Exchange Note on or before July 15, 2017, which payment must be made in cash. Interest accrues on the outstanding balance of the Second Exchange Note at a rate of 10% per annum; provided, however that if the Company fails to repay the Second Exchange Note when due, or if the Company is otherwise in default under the Second Exchange Note, at the option of Iliad a default interest rate of 18% per annum will apply. In the event the Company is in default under the Second Exchange Note, Iliad also has the option to accelerate the note with the outstanding balance becoming immediately due and payable at an amount equal to 115% of the outstanding balance of the Second Exchange Note as of the date the event of default occurred. The Second Exchange Note may be prepaid without penalty at any time.
The Second Exchange Note provides that, until the Second Exchange Note has been paid in full, Iliad may convert all or part of the outstanding note balance (the “Conversion Amount”) into shares of common stock of the Company at the Conversion Price (as defined below). Notwithstanding the foregoing, the Company has the option to pay the Conversion Amount in cash in lieu of delivering shares of its common stock. As used, “Conversion Price” means a price per share equal to 70% of the average of the three lowest closing bid prices of the Company’s common stock in the twenty trading days immediately preceding the applicable conversion. The Second Exchange Note provides that the Company may not issue shares to Iliad under the Second Exchange Note if the issuance of such shares would cause Iliad to beneficially own more than 9.99% of the Company’s outstanding common stock. The Company determined that the conversion feature of the Second Exchange Note meets the definition of an embedded derivative that should be separated and accounted for as a derivative liability. See Note 10 for a discussion relating to derivative liability.
As of November 14, 2016, the outstanding balance on the Second Exchange Note was $0.
TCA Global Credit Master Fund, LP Note December 2015
On December 24, 2015, the Company entered into a Senior Secured Credit Facility Agreement (the “Loan Agreement”) with TCA Global Credit Master Fund, LP (“TCA”). At the initial closing on December 24, 2015, the Company issued to TCA a Convertible Promissory Note in the principal amount of $750,000 (the “TCA Note”). The TCA Note is scheduled to mature on June 24, 2017 (the “Maturity Date”). At any time prior to the Maturity Date or the earlier termination of the Loan Agreement, the Company can request up to $9,250,000 of additional loans, which additional loans may be made in the sole discretion of TCA. The Company may prepay borrowings at any time, in whole or in part, without penalty. Upon origination, the Company recorded a debt discount of $706,911 and amortized $223,791 during the year ended June 30, 2016, leaving an unamortized balance of $483,120. For the three months ended September 30, 2016, the Company incurred an amortization expense of $126,031, leaving an unamortized balance of $357,089 at the end of the period.
The loan will accrue interest on the unpaid principal balance at an annual rate of 18%. The Company made interest only payments of $11,250 on each of January 24, February 24 and March 24, 2016, and thereafter, will make payments of approximately $56,208 of principal and interest per month until the Maturity Date. In the event the Company is in default under the loan agreement with TCA or any related transaction document, including as a result of a default in the Company’s payment obligations, any amount due to TCA under the facility will, at TCA’s option, bear interest from the date due until such past due amount is paid in full at an annual rate of 22%. In addition, upon the occurrence and during the continuance of an event of default under the transaction documents, TCA may terminate its commitments to the Company and declare all of the Company’s obligations to TCA to be immediately due and payable.
While the Note is outstanding, but only upon the occurrence of (i) an event of default under the loan agreement with TCA or any related transaction document or (ii) the Company’s mutual agreement with TCA, TCA may convert, subject to certain beneficial ownership limitations, all or any portion of the outstanding principal, accrued and unpaid interest and any other sums due and payable under the Note or any other transaction document (such total amount, the “Conversion Amount”) into a number of shares of the Company’s common stock equal to: (i) the Conversion Amount divided by (ii) eighty-five percent (85%) of the lowest of the daily volume weighted average price of the Company’s common stock during the five business days immediately prior to the conversion date (the “Conversion Shares”). Upon liquidation by TCA of Conversion Shares, if TCA realizes a net amount from such liquidation equal to less than the Conversion Amount, the Company is obligated to issue to TCA additional shares of the Company’s common stock equal to: (a) the Conversion Amount minus the net realized amount, divided by (b) the average volume weighted average price of the Company’s common stock during the five business days immediately prior to the date upon which TCA requests additional shares. The Company accounted for the conversion feature as a derivate liability.
The payment and performance of all the Company’s indebtedness and other obligations to TCA, including all borrowings under the loan agreement and related agreements, are secured by liens on substantially all of the Company’s assets pursuant to a Security Agreement.
Of the proceeds received at the initial closing, approximately $106,000 was used to pay in full all indebtedness outstanding under the Company’s Business Loan and Security Agreement with B of I Federal Bank (the “Bank”), entered into on November 3, 2015. Upon repayment of the Company’s indebtedness under the Business Loan and Security Agreement, the Bank released its liens on the Company’s assets. After the payment of approximately $51,000 of fees and cash expenses to TCA in connection with the loan transaction, the Company received net proceeds of approximately $593,000. As of September 30, 2016 the outstanding balance of the TCA Note was $505,432.
In connection with the Loan Agreement, the Company agreed to pay to TCA a fee for advisory services provided to the Company prior to the entry into the Loan Agreement in the amount of $126,000 (the “Advisory Fee”). As partial payment of the Advisory Fee, the Company issued to TCA 3,810,000 shares of the Company’s common stock on December 24, 2015 (the “Advisory Fee Shares”), representing 4.99% of the Company’s issued and outstanding shares of common stock on such date. In the event that TCA receives net proceeds from the sale of such shares that are less than the Advisory Fee, TCA may require the Company to issue additional shares of common stock in an amount sufficient such that, when sold and the net proceeds from such sale are added to the net proceeds from the sale of any of the previously issued and sold Advisory Fee Shares, TCA shall have received total net funds equal to the Advisory Fee. Notwithstanding the foregoing, subject to certain conditions, the Company has the right to redeem the Advisory Fee Shares then in TCA’s possession for an amount payable in cash equal to the Advisory Fee, less any net cash proceeds received by TCA from previous sales of Advisory Fee Shares. In the event TCA has not realized net proceeds from the sale of Advisory Fee Shares equal to at least the Advisory Fee by the earlier to occur of: (i) December 24, 2016; (ii) the occurrence of an event of default under the transaction documents; or (iii) the Maturity Date, then at any time thereafter, TCA has the right to require the Company to redeem all of the Advisory Fee Shares then in TCA’s possession for cash equal to the Advisory Fee, less any cash proceeds received by TCA from any previous sales of Advisory Fee Shares. The Advisory Fee was recorded as a deferred finance fee of $126,000 and the Company amortized $42,000 during the year ended June 30, 2016, leaving an unamortized balance of $84,000. During the three months ended September 30, 2016, the Company amortized $21,913, leaving an unamortized balance of $62,087 at the end of the period. The Company determined that the Conversion feature of the TCA Note and the Advisory Fee meets the definition of an embedded derivative that should be separated and accounted for as a derivative liability. See Note 10 for a discussion relating to derivative liability. |
Note 8 - Notes Payable |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Notes | |||||||||||||||||||||||||||||||||||||||||||||||||
| Note 8 - Notes Payable | NOTE 8 – NOTES PAYABLE
Bank of the West
On December 29, 2014, Kyle Winther, the Company’s CEO, entered into a vehicle financing agreement with the Bank of the West. Pursuant to the agreement, the amount financed was $39,275, payable in 48 monthly payments plus accrued interest at a rate of 3.9%, with monthly payments of $614 and a maturity date of December 29, 2018. In January 2015, the Company agreed to assume the payments on this loan and capitalized the vehicle. As of September 30, 2016 the outstanding balance was $28,798, with $7,211 and $21,587 classified as short term and long term, respectively. As of June 30, 2016 the outstanding balance was $30,348, with $7,211 and $23,137 classified as short term and long term, respectively.
Other Short Term Facilities
Effective July 10, 2016, the Company entered into an Agreement to finance its annual General Liability insurance coverage. The insurance coverage is provided through Calco Commercial Insurance. The amount of the policy is $77,240 with $59,072 being financed at 8% over 10 months with a monthly payment of $6,126. The Company made a down payment on the policy of $18,168. At September 30, 2016, the remaining premium obligation due under the Agreement was $47,570.
As of August 22, 2016, the Company entered into an insurance contract with Lloyds of London financed by AFCO for Director’s and Officer’s insurance coverage. The amount of the policy is $109,392 with $90,100 being financed at 6.85% over 9 months with a monthly payment of $10,299. The Company made a down payment on the policy of $19,292. At September 30, 2016, the remaining balance was $80,315.
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Note 9 - Net Income (loss) Per Common Share |
3 Months Ended | ||||||||||||||||||||||||||||||
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Sep. 30, 2016 | |||||||||||||||||||||||||||||||
| Notes | |||||||||||||||||||||||||||||||
| Note 9 - Net Income (loss) Per Common Share | NOTE 9 – NET INCOME (LOSS) PER COMMON SHARE
A summary of net income (loss) and shares used to compute net income (loss) per share for the three months ended September 30, 2016 and 2015 is as follows:
Dilutive shares for the three months ended September 30, 2016 of 69,856,556 are related to the TCA Global Loan Payable, TCA Advisory Fee and the Iliad Co Loan Payable. |
Note 11 - Equity |
3 Months Ended | ||||||||||||
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Sep. 30, 2016 | |||||||||||||
| Notes | |||||||||||||
| Note 11 - Equity | NOTE 11 – EQUITY
Issuance of Common Stock
The Company issued to Typenex Co-Investment, LLC shares of its common stock as partial payment of the Company’s outstanding debt obligations to Typenex as follows (see Note 7):
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Note 12 - Litigation |
3 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Notes | |
| Note 12 - Litigation | NOTE 12 – LITIGATION
Except as described below, the Company knows of no material existing or pending legal proceedings against the Company, nor is it involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of the Company’s directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to the Company’s interest.
On November 4, 2015, the Company filed a lawsuit in the Superior Court of California, County of Orange, Case Number 30-2015-00818492-CU-BC-CJC against Kevin Crump, an individual, Magnavape, Inc. and Magnavon, Inc. alleging breach of contract, fraud, negligent misrepresentation, intentional interference with economic advantage and negligent interference with economic advantage relating to the production by the defendants of the Company’s AR Mods. The lawsuit prayer is for $3,000,000. This amount includes general damages, lost profits and punitive damages against the defendants. A mandatory settlement conference is scheduled for February 24, 2017 and a jury trial is scheduled for March 27, 2017.
On January 28, 2016, Darin Dyroff, an individual, filed a lawsuit in the Superior Court of the State of California, County of San Luis Obispo, Case Number 16CV-0047 against Vip Vapor Shop & Lounge, Kennedy Enterprises, and Does 1-100. Vapor Hub was served with the Complaint by Dyroff on July 18, 2016. The Complaint asserts causes of action for strict products liability and negligent products liability and the defendant is seeking damages for pain and suffering, mental and emotional distress, future medical care, loss of earnings, lost earnings capacity, property damage, punitive damages, and costs of suit. On September 23, 2016, Steam Distribution, LLC, a defendant in the case, filed a Cross-Complaint against Vapor Hub. The case has been remitted to the Company’s product liability insurance carrier and is being handled by them. The insurance company agreed to defend Vapor Hub under its insurance policy subject to the satisfaction of the policy’s $10,000 deductible. The company does not know the potential exposure on the claim, but believes its exposure is immaterial.
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Note 13 - Subsequent Events |
3 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Notes | |
| Note 13 - Subsequent Events | NOTE 13 – SUBSEQUENT EVENTS
Subsequent to September 30, 2016, the Company paid all accrued interest and remaining principal on the Second Exchange Note, and the balance of the Exchange Note as of November 21, 2016 is $0. |
Note 2 - Summary of Significant Accounting Policies: Going Concern (Policies) |
3 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Policies | |
| Going Concern | Going Concern
The Company’s unaudited condensed financial statements have been presented on the basis that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company’s cash balance as of September 30, 2016, its working capital deficit along with other factors raise substantial doubt about its ability to continue as a going concern. The accompanying unaudited condensed financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
The Company continues to face liquidity and capital resources constraints using $147,675 in cash from operations in the three months ended September 30, 2016 and using $374,343 in financing activities during the same period. The Company does not believe that its operating cash flows will be sufficient to meet its financing needs for the next twelve months. The extent of the Company’s future capital requirements will depend on many factors, including the Company’s results from operations and the growth rate of the Company’s business. The Company’s near term objective is to raise debt or equity capital to fund its immediate cash needs and to finance its longer term growth. The Company is also pursuing various means to increase revenues, reduce operating costs and to improve overall cash flow.
The Company presently does not have any arrangements for additional financing. However, the Company continues to evaluate various financing strategies to support its current operations and fund its future growth. |
Note 2 - Summary of Significant Accounting Policies: Use of Estimates (Policies) |
3 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Policies | |
| Use of Estimates | Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates significant estimates and assumptions related to its accounts receivable allowance, accounts payable, deferred income tax asset valuation allowances, fair value of derivative liability, fair value of stock and stock options, useful life of fixed assets, recoverability of long lived assets, inventory reserves, estimates of sales return and accrual for potential liabilities. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. |
Note 2 - Summary of Significant Accounting Policies: Concentration of Risk (Policies) |
3 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Policies | |
| Concentration of Risk | Concentration of Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash. The Company places its cash with high quality banking institutions. The Company did not have any cash accounts in excess of FDIC insured limits as of September 30, 2016. The Company relied on three manufacturers to make all of the Company’s Mods during the three months ended September 30, 2016 and one manufacturer to make all of the Company’s Mods during the three months ended September 30, 2015.
The Company had a concentration in accounts payable of 45% and 49% to two manufacturers as of September 30, 2016. |
Note 2 - Summary of Significant Accounting Policies: Financial Instruments and Fair Value Measurement (Policies) |
3 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Policies | |
| Financial Instruments and Fair Value Measurement | Financial Instruments and Fair Value Measurement
Pursuant to ASC 820, Fair Value Measurements and Disclosures, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:
Level 1 - applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 - applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3 - applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The Company’s financial instruments consist principally of cash, accounts payable, accrued liabilities, amounts due to related parties, derivative liabilities and convertible notes payable. Pursuant to ASC 820, the fair value of the Company’s cash is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. Pursuant to ASC 820, the fair value of the Company’s derivative liability is determined based on “Level 3” inputs, which consist of unobservable inputs. The Company believes that the recorded values of all of its other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations. |
Note 2 - Summary of Significant Accounting Policies: Revenue Recognition (Policies) |
3 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Policies | |
| Revenue Recognition | Revenue Recognition
The Company recognizes merchandise revenues when delivery of goods or completion of services has occurred provided there is persuasive evidence of an agreement, acceptance has been approved by its customers, the fee is fixed or determinable based on the completion of stated terms and conditions, and collection of any related receivable is probable. The Company recognizes royalty revenues when products are sold by third parties and collection of any related receivable is probable.
For retail transactions, revenue is recognized at the point of sale. For wholesale and online transactions, revenue is recognized at the time goods are shipped. |
Note 2 - Summary of Significant Accounting Policies: Deferred Revenue (Policies) |
3 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Policies | |
| Deferred Revenue | Deferred Revenue
The Company accrues deferred revenue when customer payments are received, but product has not yet shipped. As of September 30, 2016 and June 30, 2016, the Company had recorded $155,276 and $94,754, respectively for deferred revenue as a result of prepayments for product made by customers. Those prepayments are recognized into revenue at the point those prepaid products have subsequently shipped. The Company expects to recognize the $155,276 into revenue during the current fiscal year. |
Note 2 - Summary of Significant Accounting Policies: Advertising Expense (Policies) |
3 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Policies | |
| Advertising Expense | Advertising Expense
Advertising costs are expensed as incurred. Advertising expense for the three months ended September 30, 2016 and 2015 were $13,015 and $38,657, respectively and are included in general and administrative expenses. |
Note 2 - Summary of Significant Accounting Policies: Deferred Finance Costs, Net (Policies) |
3 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Policies | |
| Deferred Finance Costs, Net | Deferred Finance Costs, Net
Costs with respect to the issuance of common stock, warrants, stock options or debt instruments by the Company are initially deferred and ultimately offset against the proceeds from such equity transactions or amortized to interest expense over the term of any debt funding, if successful, or expensed if the proposed equity or debt transaction is unsuccessful.
Unamortized finance costs for the three months ended September 30, 2016 and as of June 30, 2016 were $100,302 and $133,166 respectively.
The Company adopted ASU 2015-03 during the quarter ended September 30, 2016, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The Company’s adoption of this ASU did not have a significant impact on the Company’s financial position, results of operations or cash flows. The adoption resulted in a reclassification of deferred finance costs of $100,302 and $133,166 from current assets to offset against convertible notes payable in current liabilities as of September 30, 2016 and June 30, 2016, respectively. |
Note 2 - Summary of Significant Accounting Policies: Modification of Debt Instruments (Policies) |
3 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Policies | |
| Modification of Debt Instruments | Modification of Debt Instruments
The Company evaluated modifications of debt instruments under ASC 470-50-40 “Extinguishments of Debt” (“ASC 470”). ASC 470 requires modifications to debt instruments to be evaluated to assess whether the modifications are considered “substantial modifications”. A substantial modification of terms shall be accounted for like an extinguishment. For extinguished debt, a difference between the re-acquisition price and the net carrying amount of the extinguished debt shall be recognized currently in income of the period of extinguishment as losses or gains. |
Note 2 - Summary of Significant Accounting Policies: Basic and Diluted Net Loss Per Share (Policies) |
3 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Policies | |
| Basic and Diluted Net Loss Per Share | Basic and Diluted Net Loss per Share
The Company computes net income per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options, warrants or debentures. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. As of September 30, 2016, there were 69,856,556 dilutive securities related to the convertible notes payable as the Company had net income and as of September 30, 2015, there were no dilutive securities as the Company had incurred a net loss. See Note 9 for further discussion. |
Note 2 - Summary of Significant Accounting Policies: Recent Accounting Pronouncements (Policies) |
3 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Policies | |
| Recent Accounting Pronouncements | Recent Accounting Pronouncements
In August 2016 the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently in the process of evaluating the impact of adoption on its financial statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The Company is currently in the process of evaluating the impact of the adoption on its financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. The ASU will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of adopting this guidance.
In November 2015, the FASB issued ASU 2015-17, which simplifies the presentation of deferred tax assets and liabilities on the balance sheet. Previous GAAP required an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts on the balance sheet. The amendment requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The Company is currently evaluating the potential impact this standard will have on its financial statements and related disclosures.
In September 2015, the FASB issued ASU 2015-16, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This ASU is effective for interim and annual reporting period beginning after December 15, 2016, including interim periods within those fiscal years, with the option to early adopt for financial statements that have not been issued. The Company is currently evaluating the potential impact this standard will have on its financial statements and related disclosures.
In July 2015, the FASB issued ASU 2015-11, which requires an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments apply to inventory that is measured using first-in, first-out (FIFO) or average cost. This ASU is effective for interim and annual reporting periods beginning after December 15, 2016, with the option to early adopt as of the beginning of an annual or interim period. The Company does not expect the adoption of this ASU to have a significant impact on its financial position, results of operations and cash flows.
The Company has reviewed other recent accounting pronouncements issued prior to the date of issuance of its financial statements included in this report, and does not believe any of these pronouncements will have a material impact on its financial statements. |
Note 7 - Convertible Notes Payable: Schedule of Convertible Notes Payable Text Block (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Tables/Schedules | ||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Convertible Notes Payable Text Block |
|
Note 8 - Notes Payable: Schedule of Notes Payable Text Block (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Tables/Schedules | |||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Notes Payable Text Block |
|
Note 9 - Net Income (loss) Per Common Share: Schedule of Earnings Per Share, Basic and Diluted (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2016 | |||||||||||||||||||||||||||||||
| Tables/Schedules | |||||||||||||||||||||||||||||||
| Schedule of Earnings Per Share, Basic and Diluted |
|
Note 2 - Summary of Significant Accounting Policies: Going Concern (Details) - USD ($) |
3 Months Ended | |
|---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
|
| Details | ||
| Net Cash used in Operating Activities | $ 147,675 | $ 106,007 |
| Net cash provided by financing activities | $ 374,343 | $ 80,229 |
Note 2 - Summary of Significant Accounting Policies: Deferred Revenue (Details) - USD ($) |
Sep. 30, 2016 |
Jun. 30, 2016 |
|---|---|---|
| Details | ||
| Deferred Revenue | $ 155,276 | $ 94,754 |
Note 2 - Summary of Significant Accounting Policies: Advertising Expense (Details) - USD ($) |
3 Months Ended | |
|---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
|
| Details | ||
| Advertising Expense | $ 13,015 | $ 38,657 |
Note 3 - Officers' Loans Payable (Details) - USD ($) |
Sep. 30, 2016 |
Jun. 30, 2016 |
|---|---|---|
| Details | ||
| Loans from related parties | $ 146,277 | $ 103,409 |
Note 4 - Inventories (Details) - USD ($) |
Sep. 30, 2016 |
Jun. 30, 2016 |
|---|---|---|
| Details | ||
| Inventory | $ 790,399 | $ 585,489 |
Note 5 - Lease Commitments (Details) - USD ($) |
1 Months Ended | 3 Months Ended | 15 Months Ended | |
|---|---|---|---|---|
Sep. 30, 2015 |
Sep. 30, 2016 |
Sep. 30, 2015 |
Sep. 30, 2016 |
|
| S.J. Real Estate Group, LLC | ||||
| Other Commitment | $ 3,190 | $ 3,190 | ||
| Winther Family Trust | ||||
| Monthly Lease and Rental Expense | 5,650 | |||
| Susana Business Center, LLC | ||||
| Other Commitment | 21,624 | 21,624 | ||
| Monthly Lease and Rental Expense | $ 1,716 | |||
| Security Deposit | 1,802 | $ 1,802 | ||
| Total | ||||
| Operating Leases, Rent Expense | $ 31,668 | $ 32,952 | ||
Note 6 - Related Parties (Details) - USD ($) |
3 Months Ended | |
|---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
|
| Details | ||
| Professional Fees | $ 10,156 | $ 18,262 |
Note 7 - Convertible Notes Payable (Details) - USD ($) |
Nov. 14, 2016 |
Dec. 24, 2015 |
Aug. 12, 2015 |
|---|---|---|---|
| Iliad Research Trading LP | |||
| Convertible Notes Payable | $ 245,000 | ||
| Convertible Debt, Current | $ 0 | ||
| TCA Global Credit Master Fund, LP | |||
| Convertible Notes Payable | $ 750,000 |
Note 8 - Notes Payable: Schedule of Notes Payable Text Block (Details) - Balance 09/30/2016 |
Sep. 30, 2016
USD ($)
|
|---|---|
| Calco Commercial Insurance | |
| Other Notes Payable | $ 47,570 |
| AFCO Insurance | |
| Other Notes Payable | 80,315 |
| Bank of the West- short term portion | |
| Other Notes Payable | 7,211 |
| Total Short Term Notes Payable | |
| Other Notes Payable | 135,096 |
| Bank of the West- long term portion | |
| Other Notes Payable | 21,587 |
| Total Long Term Notes Payable | |
| Other Notes Payable | $ 21,587 |
Note 8 - Notes Payable (Details) - General Liability Insurance - USD ($) |
Sep. 30, 2016 |
Jul. 10, 2014 |
|---|---|---|
| General Liability Insurance | $ 59,072 | |
| General Liability Insurance Coverage | $ 47,570 |
Note 9 - Net Income (loss) Per Common Share: Schedule of Earnings Per Share, Basic and Diluted (Details) - USD ($) |
3 Months Ended | |
|---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
|
| Details | ||
| Net loss for computation of basic and dilutive net (loss) per share | $ 366,325 | $ (74,153) |
| Earnings Per Share, Basic and Diluted | $ 0.00 | $ (0.00) |
| Weighted average shares outstanding, basic | 88,986,765 | 72,455,606 |
| Weighted average shares outstanding, diluted | 158,843,321 | 72,455,606 |
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